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Published: Fri, 02 Feb 2018
Partnerships one of more common modes of business operation in malaysia
Partnerships are one of the more common modes of business operation in Malaysia. There are many partnerships in the country. Partnerships are formed to operate concerns varying from trading firms to professional firms (e.g. legal, accounting and medical practices). A basic knowledge of the law governing partnerships is important to bankers, accountants and the business community as a whole. The law of partnership is governed by the Partnership Act 1961 (Revised 1974). This is similar to the English Partnership Act 1890. A number of principles of law arising from the English Act apply in Malaysia. Section 47(1) of the Partnership Act 1961 I provides that the rules of equity and of common law applicable in partnership will I continue in force, except in so far as they are inconsistent with the express provisions of the Act. In Peninsular Malaysia, it is necessary that all partnership businesses, as well as sole proprietorships must be registered with the Companies Commission of Malaysia I (CCM) in compliance with the requirements of the Registration of Businesses Act, 1956 (Revised 1978)1. Prior to the establishment of the CCM in April 2002, the | functions relating to registration of businesses was undertaken by the Registrar of Businesses.an addition Islamic jurisprudence did not leave out any kind of human activity whether it was legal or illegal. Muslim jurisprudents discussed at length all kinds of activities and formulated judgments on them derived from the Shari ‘ah. The subject of partnership is no exception. A person may need to enter into partnership with others either out of his own free will or unwillingly. Islamic jurisprudence has explained all things concerning partnership and companies. The Arabic word sharekah (partnership or company) means mixing two shares in a way to make them indistinguishable. The share may be money, labor or anything else. In this sense, we would understand the word “shuraka'” (partners) in the hadith of the Prophet (PBUH), “People are partners in three [things]: water, herbage and fire.”
2. DEFINITION AND NATURE OF PARTNERSHIP
Section 3(1) of the Partnership Act 1961 defines a partnership as, Definition of partnership.
3. (1) Partnership is the relation which subsists between persons carrying on business in common with a view of profit. By virtue of section 3(2), Partnership Act 1961, co-operative societies and registered statutory and chartered companies are specifically excluded from the definition. This subsection reads:
3. (2) the relation between members of any company or association which
Is 🙁 a) registered as a company under the Companies Act, 1965 or as a cooperative society under any written law relating to co-operative societies; or,
(b) Formed or incorporated by or in pursuance of:
(i) any other law having effect in Malaysia or any part thereof; or (ii) any letters patent, Royal Charter or Act of the Parliament of the United Kingdom, is not a partnership within the meaning of this Act. In Peninsular Malaysia, a partnership business must be registered 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); and in Sabah, under the Trade Licensing Ordinance No. 16 1948. 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.
From the definition which mention above of partnership of partnership in section 3(1) of the Partnership Act 1961, for a partnership to exist, two or more persons must be ‘carrying on business in common’. The word ‘business’ has been defined in section 2 of the Partnership Act 1961 as ‘including every trade, occupation or profession’. 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, societies and cooperatives are not considered as partnerships.
Definition of partnership in Islamic jurisprudence:
Several definitions are to be found in writings of Islamic jurisprudence. Following are only a few of them: Hanafi scholars define partnership as “a contract between partners on both capital and profit.” Shafi’i scholars define partnership as “a contract giving the right in something to two or more people, making it common.” According to Hanbali scholars, it is “the coming together of two or more people in disposal or acting.”
Certain circumstances are not prima facie partnerships.
Section 4 of the Partnership Act 1961 lays down certain circumstances which are not prima facie partnerships. The said section reads:
In determining whether a partnership does or does not exist, regard shall be had to the following rules:
(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;
(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 derived;
(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, hut 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; and in particular:
(i) 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; (ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such; (iii) 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; (iv) 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; and
(v) 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.
The following explains the above-mentioned section 4 of the Partnership Act 1961:
‘Joint tenancy’ and ‘tenancy in common’ refer to ownership of property by two or more persons; common or joint ownership does not imply the existence of a partnership unless there are other circumstances which exist which are evidence of a partnership. For example, if Ali and Hassan own a four-storey shop house and they merely share the rental derived from the shop house and nothing else, Ali and Hassan are not partners. If, however, Ali and Hassan run a departmental store in the shop house and they put in capital and run the business with a view to making profits, they are partners.
The general rule is that if a person receives a share of the profits, he is prima facie deemed to be a partner of the firm. The meaning Section 4(c) that ‘the receipt by a person of a share of the profits of business is prima facie evidence that he is a partner in the business’ There are particular instances listed under this subsection whereby the receipt of a share of profits does not qualify a person to be a partner. They are:
1. Section 4(c)(i): Payments by instalments
Example: If Mandy advances RM50,000 to a firm and the firm repays her by ten monthly instalments of RM5,000 each, Mandy is not a partner of that firm.
2. Section 4(c)(ii): Payment of servant or agent.
3. Section 4(c)(iii): Annuity to the widow or children of a deceased partner
4. Section 4(c)(iv): Loan given with a rate of interest varying with profits
5. Section 4(c)(v): Sale of goodwill
Forms of Partnership under Islamic Law:
Partnerships are generally of two kinds: companies of ownership and companies of contracts. A partnership of ownership means that two people share the ownership of a property either by their own choice (by agreeing to buy the property) or without their choice (by inheriting the property for example). Thus each one of them becomes a partner of the other, and neither one of them can dispose of the object on his own without getting permission from his partner. A partnership of contract is a contract between two or more people to have partnership in capital and profit
Shirkat-al-Anan (2) Shirkat-al-Mufavadha (3) Shirkat-al- Wajooh (4) Shirkat-al-Sanai
1. Shirkat-al- Anan:
When two persons consolidate their share in form of cash in order to start some type of business, this partnership is called shirkat-al-Anan. Under this form of partnership there is compulsion for the partners to invest cash only. If one brings goods or both contributed in form of goods, it may not be named as shirkat-al-Anan. The profit is distributed among the partners according to the agreement or by mutual consent but it should be proportional (i.e. 2/3, 1/3 etc) and not in the actual figures say Rs.1000 to partner A and the remaining to partner B.
Features of Shirkat-al-Anan
(i) One partner is not considered as an agent of another partner.
(ii) The capital invested in the business may not be equal.
(iii) Each partner may receive the share of the profit less or more or equal to the rate of capital.
(iv) If one partner accepts loan other will not be liable for it.
(v) This kind of partnership may be formed by oral understanding.
The apple “Mufavadha” agency equality. In this blazon of affiliation anniversary accomplice contributes according allocation of capital. Anniversary accomplice has according allotment in the accumulation or accident of the Business. One accomplice is admired as an abettor as able-bodied as abettor of addition partner. If one accomplice owes to addition is business affairs added will aswell be advised liable. So there is no bigotry a part of the ally in account of status, position, rights and added affairs of Business. As there is adequation in this anatomy of partnership, it cannot be formed amid developed and minor, Muslims and Non- Muslims, masters and servants, freemen and slaves.
In this blazon of affiliation no accomplice contributes any bulk in business. Accomplished bodies are not complex in this partnership. Shirkat-I-Wajooh is formed by acceding for the article of purchasing appurtenances on acclaim base in adjustment to accumulation them to market. One accomplice is admired as an abettor of addition partner. The accumulation is broadcast amid ally according to the commensurable bulk of good~ purchased on acclaim for the business by anniversary accomplice concerned.
When accomplished bodies amalgamate beneath an acceding to conduct accurate blazon of job or business, it is alleged shirkat-al-Sanai. It is aswell alleged as Shirkat-al- Taqbbal. Two tailors may accompany calm for the purpose of accustomed on business. If one takes an appointment both will be accountable to accomplish it according to the agreeableness of customer. If one earns something the accumulation will be aggregate by the added on according basis. Any how the assets acquired by one or both ally will be disconnected amid them according to the accoutrement of agreement.
Relations between Partners and Third Parties
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 firm’s business. Section 7 of the Partnership Act 1961 reads:
Power of partner to bind firm:
Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act of carrying on in the usual way business of the kind carried on by the firm of which he is a member will bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner .The authority of each partner may be either actual (express or implied) or apparent (or ostensible). Express authority may be given in writing (as in the partnership agreement) or orally. Implied authority is inferred from the conduct of the parties. Apparent or ostensible authority arises when the partner hoids out to others that he has such authority.
LIABILITY OF PARTNERS:
Section 12 of the Partnership Act 1961 states: Liability of firm for wrongs. 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 firm, or any penalty is incurred, the firm is liable thereafter to the same extent as the partner so acting or omitting to act.
It is noted that 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. For example, 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 liable for the negligence of one of the partners.
Section 13 of the Partnership Act 1961 states:
Misapplication of money or property received for or in custody of firm. In the following cases, namely:
(a) Where one partner, acting within the scope of his apparent authority, receives the money or property of a third person and misapplies it; and
(b) Where a firm in the course of its business receives the money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm, the firm is liable to make good the loss.
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 loos 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
Section 15 of the Partnership Act 1961 reads: Improper employment of trust property for partnership purposes.
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:
(a) This section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust; and
(b) 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.
In simple terms, the aforementioned section means that 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 firm’s possession or under its control, the beneficiaries can recover the same from the firm.
Section 11 of the Partnership Act 1961 states:
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, and after his death his estate is also severally liable in due course administration for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts.
In other words, the effect of this section is that 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. 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 partner’s bankruptcy or otherwise any other partner or partners who has or have not been sued cannot be used in a subsequent new proceeding or proceedings. A joint liability basically means that where 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.
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) of the Partnership Act 1961 states: Where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change.
Relations between Partners to One Another
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 are provided for in section 26 of the Partnership Act 1961 which states as follows: Rules as to interests and duties of partners, subject to special agreement.
26. The interests of partners in the partnership property, and their rights and duties in relation to the partnership,” ‘shall be determined, subject to any agreement, express or implied, between the partners, by the following rules:
(a) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm;
(b) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him
(i) In the ordinary and proper conduct of the business of the firm; or (ii) in or about anything necessarily done for the preservation of the business or property of the Firm;
(c) a partner making, for the purposes of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of eight per cent per annum from the date of the payment or advance;
(d) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him;
(e) Every partner may take part in the management of the partnership business;
f) No partner shall be entitled to remuneration for acting in the partnership business;
g) No person may be introduced as a partner without the consent of all existing partners; ti) any difference arising as to ordinary matters connected with the partnership business may be decided
by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners; and (i) the partnership books are to be kept at the place of business of the partnership (or the principal place, if there are more places than one) and every partner may, when he thinks fit,
The above rules apply in the absence of an agreement to the contrary. The priciple 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 based on mutual trust and confidence. The relevant provisions in the Partnership Act 1961 pertaining to this are sections 30, 31 and 32 which read as follows:
Duty of partners to render accounts,
30. Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.
Accountability of partners for private profits.
31. (1) every partner must account to the firm for any benefit derived by him, without the consent of the other partners, from any transaction concerning the partnership or from any use by him of the partnership property, name, or business connection.
(2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner, and before the affairs thereof have been completely wound up, either by any surviving partner or by the representatives of the deceased partner.
Duty of partner not to compete with firm:
32. If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.
In short, section 30 of the Partnership Act 1961 provides that partners are boun 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 r. is aware of the financial situation of the firm, to disclose all the material facts to the partner who is selling the share.
Section 31 of the 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. And he must not make a profit from a sale of the firm’s 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. The principle 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.
Partnership property has been defined in section 22(1) of the Partnership Act 1961 as:
All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business,… and must beheld and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement provided that the legal estate or interest in any land which belongs to the partnership shall devolve according to the nature and tenure thereof and the general rules of law applicable thereto but in trust, so far as necessary, for the persons beneficially interested in the land under this section.
From the second limb of section 22(1), Partnership Act 1961, as stated above, it is clear that partnership property must be used and applied for the purposes of the firm and in strict accordance with the partnership agreement.
DISSOLUTION OF PARTNERSHIP
A partnership ‘dies’ when it is dissolved. Dissolution of partnership 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.
Ways in which a Partnership is dissolved:
A partnership may be terminated or dissolved in the following ways:
1- By agreement:
(a) if duration of the partnership has been specified in the partnership agreement, the partnership is terminated on the expiry of that period;
(b) if the partners mutually agree to dissolve the partnership.
2- By operation of law (unless otherwise agreed between the partners)
(a) if the partnership was entered into for a fixed term and the term expires— section 34(l)(a), Partnership Act 1961;
(b) if the partnership was entered into for a single adventure or undertaking, and that adventure or undertaking terminates—section 34(l)(b), Partnership Act 1961;
(c) if the partnership was entered into for an undefined time, by any partner giving notice to the other partner(s) of his intention to determine (or end) the partnership—section 34(l)(c), Partnership Act 1961.
3-By death or bankruptcy (unless otherwise agreed between the partners—section
35(1), Partnership Act 1961,
4- By charging on shares—section 35(2), Partnership Act 1961.
5- By supervening illegality—section 36, Partnership Act 1961.
6- By court order—section 37, Partnership Act 1961.
The full text of sections 34 to 37, Partnership Act 1961, which state the various ways in which partnerships can be dissolved, is as follows:
Dissolution by expiration or notice.
.34. (1) Subject to any agreement between the partners, a partnership is dissolved:
(a) If entered into for a fixed term, by the expiration of that term;
(b) If entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or
(c) if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership.
(2) In the last-mentioned case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is so mentioned, as from the date of the communication of the notice.
Dissolution by bankruptcy, death or charge.
35. (1) Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.
(2) A partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the partnership property to be charged under this Act tor his separate debt.
Lee Choo Yam Holdings Sdn Bhd & Ors V Khoo Yoke Wah & Ors [19901 2 Mlj ) 431
Facts: The plaintiffs applied for a declaration that the partnership was dissolved by the death of any partner.
Held: Allowing the plaintiffs’ application:
1. Upon the true construction of section 35(1) of the Partnership Act 1961, the agreement made between the partners to the contrary must have been made before the death of any partner. An agreement made by the surviving partners after the death of a partner without the agreement of the deceased partner will not bind the deceased partner nor will it make the partnership a continuing partnership.
2. On the death of any partner, a partnership therefore stands dissolved un-less there is evidence that the partners had agreed otherwise. The onus is on the defendants to prove not only the existence of an agreement between the surviving partners but the existence of an agreement between all the partners including the deceased partner. (This is so because by the death of ‘ the partner it is no longer possible to adhere to the original contract, the essence of which must be that all parties to it must be alive.)
The appeal to the Supreme Court from the above case was dismissed and the Supreme Court reiterated that by reason of the terms of section 35 of the Partnership Act 1961, the death of a partner, in the absence of agreement between the partners, dissolves the partnership—Khoo Yoke Wah & Ors v Lee Choo Yam Holdings Sdn Bhd& Ors7″ and Chia Foon Tau & Anor (suing as the executrix of the estate of Cnong Tzu Chieh, deceased) v Lim Pey Lin
Dissolution by illegality of partnership.
36. A partnership is in every case dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership.
Dissolution by the court,
37. On application by a partner, the court may decree dissolution of the partnership in any of the following cases:
(a) when a partner is found lunatic or is shown, to the satisfaction of the court, to be of permanently unsound mind, in either of which cases the application maybe made as well on behalf of that partner, by his committee, or next friend, or person having title to intervene as by any other partner;
(b) When a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract;
(c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business;
(d) when a partner, other than the partner suing, wilfully or persistently commitss a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably prac
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