1. Relationship of Partners and 3rd parties (Section 7)
1.1. Section 7 of the Partnership Act 1961 (Malaysia) states that every partner is an agent of the firm and the other partners for business purposes. This means that any decision or contract made by one partner within the scope of the partnership binds all partners. However, if a partner acts beyond their authority or outside the business scope, the firm may not be liable unless the other partners agree. For example, if a partner buys goods for the business, all partners are responsible, but if they take a personal loan using the firm's name without consent, the firm is not liable.
1.2. Conditions of Section 7 (Partnership Act 1961, Malaysia) – Partners as Agents of the Firm For a partner’s actions to legally bind the firm and other partners, the following conditions must be met:
1.2.1. 1)The partner must act as an agent – The action must be within their role as a partner.
1.2.1.1. Case: Chan Kin Yue v Lee & Wong
1.2.1.1.1. Background: Mr. Lee, a partner in the firm Lee & Wong, borrowed RM35,000 from his wife, Mrs. Lee, to settle the firm's debts. He provided her with a receipt in the firm's name. The borrowed funds were deposited into the partnership's account and used to pay off the firm's liabilities. Mrs. Lee sought repayment from the partnership, but the other partner, Mr. Wong, contended that Mr. Lee lacked authority to borrow money on behalf of the firm, asserting the loan was a personal matter. Court's Decision: The court held that since the loan was utilized to settle the partnership's debts, the firm was liable for its repayment. The court applied equitable principles, referencing the English case Bannatyne v. D&C Maclver [1906] 1 K.B. 103, to conclude that the loan, having benefited the firm, was effectively a partnership obligation. Legal Principle: A partner's act of borrowing money can bind the partnership if the funds are used for the firm's benefit, even if the borrowing partner lacked explicit authority. The partnership's liability arises from the equitable principle that benefits conferred upon the firm obligate it to honor the associated debts.
1.2.2. 2)The act must be within the scope of the business – It must relate to the partnership’s usual activities.
1.2.2.1. Case: Merchantile Credit v Garrod
1.2.2.1.1. Background: Garrod and another person (Parker) were partners in a garage business. Their partnership agreement stated that their business was only for car repairs and storage, not for selling cars. However, Parker (Garrod’s partner) wrongfully sold a car to Mercantile Credit Co Ltd, even though he had no authority to do so. Mercantile Credit Co Ltd sued Garrod, claiming that he was liable as a partner. Court’s Decision: The court ruled that Garrod was liable, even though he did not authorize the sale. This was because under the law of partnership (Partnership Act 1890 – UK, similar to Malaysia’s Partnership Act 1961), every partner is an agent of the firm. Since selling cars could be seen as part of a garage business, Mercantile Credit Co Ltd had no way of knowing Parker had no authority. Legal Principle: A partner can bind the entire firm, even if they act outside the partnership agreement, if the act appears to be within the scope of the business. Third parties dealing in good faith can hold all partners liable for one partner’s wrongful acts
1.2.3. 3)The act must be done in the firm’s name or on behalf of the firm – The partner must clearly represent the business [Re Briggs & Co Ex parte Wright
1.2.3.1. Re Briggs & Co Ex parte Wright
1.2.3.1.1. Background: R. B. Briggs & Co. was a partnership between R. B. Briggs (father) and H. R. Briggs (son). Without his father's knowledge, H. R. Briggs assigned the firm's book debts to secure a personal loan. The firm later became insolvent, and the trustee in bankruptcy challenged the validity of the assignment. Court's Decision: The court held that the assignment was binding on the firm, even though only one partner executed it without the other's knowledge. This decision was based on the principle that a partner's actions, when conducted in the firm's name and relating to its business, can bind the partnership. Legal Principle: A partner's act, performed in the firm's name and within the scope of its business, is binding on the firm and all partners, regardless of internal agreements or the other partners' knowledge. This case emphasizes that partners should be cautious about the authority they grant to each other, as actions taken by one partner can have significant implications for the entire partnership.
2. Liability of Partners
2.1. Contractual: Section 11
2.1.1. All partners are jointly liable for contracts made by any partner on behalf of the firm. If one partner enters into a contract within the scope of the business, the entire firm is bound. Example: If a partner signs a supply contract for goods, all partners are liable to pay for it.
2.2. Tortious: Section 12
2.2.1. All partners are jointly and severally liable for wrongful acts (torts) committed by any partner while conducting partnership business. This includes negligence, fraud, and misrepresentation by a partner. Example: If a partner misleads a customer and causes financial loss, the firm and all partners are liable.
2.3. Criminal: Not Joint Liable
2.3.1. Generally, the firm is not liable for a partner’s criminal acts unless: The crime was committed within the scope of business. Other partners were aware or involved. Example: If a partner commits fraud as part of business dealings, all partners may be held responsible. But if a partner commits theft for personal gain, only that partner is liable.
2.4. Holding out: Not Authorised
2.4.1. If a person represents themselves as a partner, or allows others to believe they are a partner, they can be held liable as if they were a real partner. Even if they are not officially a partner, they may be forced to pay partnership debts if third parties relied on their representation. Example: If a retired partner allows the firm to use their name, they may still be liable for new debts.
3. Incoming [Section 19 (1)] v Retiring Partner [Section 19 (2) & (3)
3.1. Incoming partners start fresh and are not responsible for past debts, while retiring partners must settle old debts and ensure proper notice to avoid future liability.
4. Types of partners
4.1. 1. Active Partner ✅ Actively participates in managing the business. ✅ Has unlimited liability—personally responsible for debts. ✅ Can bind the firm in contracts and business dealings. 📌 Example: A partner in a law firm who handles clients and operations daily.
4.2. 2. Dormant partner ✅ Invests in the business but does not participate in management. ✅ Still has unlimited liability for the firm’s debts. ✅ Shares in profits and losses but has no say in decisions. 📌 Example: A wealthy investor in a cafe business who lets the other partners run it.
4.3. 3. Quasi Partner ✅ Was previously a partner but has retired or withdrawn their capital. ✅ Still receives a share of profits, making them appear as a partner. ✅ Not actively involved but may be liable under "holding out" (Section 16) if they allow others to assume they are still a partner. 📌 Example: A retired partner in a consulting firm who still gets a percentage of profits.
4.4. 4. Salaried Partner ✅ Receives a fixed salary instead of a share of profits. ✅ May or may not share in the firm's liability depending on the agreement. ✅ Typically has no major decision-making power but can act on behalf of the firm. 📌 Example: A senior lawyer in a law firm who is called a "partner" but is paid a salary instead of profit shares.
5. Dissolution
5.1. 1. Dissolution Without Court Intervention This happens when partners voluntarily dissolve the partnership based on an agreement or certain legal conditions. ✅ By Agreement (Section 34) – Partners mutually agree to dissolve the partnership. ✅ By Expiry (Section 34) – If the partnership was for a fixed period, it dissolves automatically when the time expires. ✅ By Completion of Purpose (Section 34) – If the partnership was for a specific project, it dissolves once the project is completed. ✅ By Death or Bankruptcy (Section 35) – If a partner dies or becomes bankrupt, the partnership automatically dissolves unless there is an agreement to continue. ✅ By Illegality (Section 36) – If the partnership's business becomes illegal (e.g., new laws prohibit it), it must dissolve. 📌 Example: A construction partnership formed for a specific project dissolves after the project is completed.
5.2. 2. Dissolution With Court Intervention (Section 37) A partner may apply to the court to dissolve the partnership under specific circumstances. ✅ Partner’s Incapacity – If a partner becomes mentally or physically incapable of performing their duties. ✅ Partner’s Misconduct – If a partner engages in fraud, dishonesty, or illegal activities harming the business. ✅ Persistent Breach of Agreement – If a partner constantly violates partnership terms, making business impossible. ✅ Losses & Unprofitability – If the business can no longer operate profitably. ✅ Just & Equitable Grounds – If continuing the partnership is unfair to one or more partners. 📌 Example: A partner commits fraud, and the others apply to the court to dissolve the partnership.
6. Definition under Section 3(1) Partnership Act 1961:
6.1. The relation which subsists between persons carrying on business in common with a view of profit
7. Elements
7.1. A partnership exists when: 1) at least two people 2) run a business together 3) to make a profit
7.1.1. Case: Alagappa Chettiar (Plaintiff) v Coliseum Cafe (Defendant)
7.1.1.1. The issue was whether a partnership could hold a tenancy since it is not a separate legal entity. Background: Alagappa Chettiar owned a building, and Coliseum Café, a partnership business, was renting part of it. Chettiar wanted to take back the property, arguing that a partnership could not legally be a tenant. Lower Court Decision: The Sessions Court ruled in favor of Chettiar, agreeing that the partnership could not be a tenant. Appeal Decision: The High Court overturned the ruling, and the Court of Appeal upheld this, stating that while a partnership is not a separate entity, its partners can jointly hold a tenancy.
8. Section 4(a) Joint ownership/tenancy
8.1. Joint ownership means two or more people share equal ownership of a property, and if one dies, their share goes to the others automatically.
8.1.1. Case: Davis v Davis
9. Section 4 (b) Sharing of Gross Returns
9.1. Under Section 4(b) of the Partnership Act 1961 (Malaysia), the sharing of gross returns does not automatically create a partnership. Explanation: If two or more people share the gross returns (total income before expenses) of a business, it does not mean they are partners. A partnership exists only if they share profits and have a mutual business relationship. Simply sharing revenue (without sharing profits, losses, or control over the business) does not establish a partnership.
9.1.1. Case: Cox v Coulson
9.1.1.1. The case of Cox v. Coulson (1916) illustrates the principle that sharing gross returns does not automatically create a partnership under Section 4(b) of the Partnership Act 1961 (Malaysia). Background of the Case: Mr. Cox owned a theatre and agreed with Mr. Coulson, a playwright, to stage a play. The agreement stated that box office earnings (gross returns) would be shared: 60% to Cox (theatre owner). 40% to Coulson (playwright). A third party suffered an injury during the play and sued both Cox and Coulson, claiming they were partners and thus jointly liable. Court’s Decision: The court ruled that Cox and Coulson were not partners because they only shared gross revenue, not profits and losses. Since they did not manage the business together, there was no partnership relationship. Legal Principle: Sharing gross returns (income before deducting expenses) does not mean a partnership exists. A partnership requires joint business control and profit-sharing, not just revenue sharing
10. Section 4 (c) Sharing of Profit
10.1. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but does not necessarily mean a partnership exists.
10.1.1. Exceptions: Section 4 (c)(i) to (v)
10.1.2. Section 4(c)(i) Payment of debt by installment [A lender receiving a portion of the profits as repayment for a loan is not a partner.]
10.1.2.1. Case: Badely v Consolidated Bank
10.1.3. Section 4(c)(ii) Remuneration [ An employee who is paid a percentage of profits as wages is not a partner.]
10.1.3.1. Case: Chua Ka Seng v Boonchai Sompolpong
10.1.4. Section 4(c)(iii) Annuity [If a deceased partner’s family receives a share of profits as an annuity, they are not partners.]
10.1.4.1. Case: IRC v Lebus's Trustee
10.1.5. Section 4 (c)(iv) Payment of Loan/Interest on loan [If a lender receives loan repayment in the form of a share of the business profits, it does not mean they are a partner. The lender does not have control over the business or share in the losses..]
10.1.5.1. Case: Re Young ex parte Jones
10.1.6. Section 4(c)(v) Sale of goodwill [If a person sells the goodwill of a business and agrees to receive a portion of the profits as payment, this does not make them a partner in the business.]
10.1.6.1. Case: Pratt v Strick