Definition & Formation of Partnership


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  • a) Sole proprietorship A person handles a business all by himself Simplest and oldest, suitable for small scale business, where there is not much risks because capital,profit and losses are all on him Eg: grocery business, restaurant etc Disadvantage, owner exposed to unlimited liability b)Partnership similar with above but the business is conducted by more than one person c) Company Known as incorporated association Differ from the above because the company is considered as a separate person from the persons who form it.
  • Note: Sec 47(1) of MPA, the rules of equity and common law applicable to partnership shall continue in force except when they are inconsistent with the express provision of the MPA. Companies Commission has been established by virtue of the Companies Commission Act 2001.
  • From these two cases it is understood that the word relation refers to contractual relation.
  • P and D were medical practitioner. P denied the existence of partnership. P agreed that there was a discussion on the formation of the partnership between them but there was no partnership agreement. According to the court a verbal partnership existed between the parties.
  • Basically confined to services or goods provided by individuals in exchange for commercial gain. Thus voluntary organisations established for charitable or religious purposes cannot be partnership. The same with clubs and societies. – involve buying and selling with a view of profit
  • # 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 profit. #3There was no partnership resulting from a joint venture agreement between a landowner and a housing developer because each party to the agreement intended a wholly separate business, there was no business in common with a view of profit.
  • #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. 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. 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.   #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.  
  • 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.
  • #1Ratna Ammal & Anor v Tan Chow Soo [1964] 30 MLJ 399 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 registered.
  • joint tenancy – there is unity of possession, title, time. - two or more persons have interests in a property. -         on death of a joint tenant the entire property goes to survivor. tenancy in common – two or more persons own distinct and undivided shares in the property. -         on death, passes to the next of kin or according to his will . - share need not be equal Under the above circumstances there is no partnership, regardless of whether the tenants or owners do or do not share any profits.   Merely owned a property with other person (joint ownership) and rent the property and there is gross profit, does not make the parties partners.   Carrying business on a property, the business might be partnership, but the property can be personally owned. An agreement is needed to consider it as partnership property. Parties can be partners to the business but might not be partners to the property
  • #1Two persons make profits from coach business.One provides the coach and the other provides the horse.   #2A father left to his two sons his business and three freehold houses in equal shares as tenant in common. They let one of the houses and used the rent to enlarge the workshop attached to the two houses. They continued to carry on the business and each drew out from it a weekly sum, and no account was kept. The rent of the third house was divided from them. #3 Appellant entered into a tenancy agreement with A and B who carried on partnership business. Subsequently the respondent joined the partnership. B withdraw from the partnership and the business was carried on in the name of the respondent and A. When the tenancy agreement expired, notice to quit was given by the appellant to A and B.The appellant obtained a writ of possession in respect of the premises. The respondent claimed that he was the tenant and claimed damages for wrongful eviction.     Held : There is a partnership in the business but not to the premises. Thus the respondent is not the tenant to the premises.  
  • Sutton & Co v Grey Held: Commission given to a person for introducing business to a firm of stockbrokers does not amount a profit. It was only gross returns.   Cox v Coulson (1916) 114 L.T. 599 Defendant (theatre manager) provided a theatre to Mr Mill (who provide the performance). Defendant received 60% of gross takings and Mr Mill 40%. Plaintiff (who was a member of the audience) injured by a fire shot by an actor during the performance claimed that the defendant was liable because he was a partner to Mr Mill.   Held: Defendant was not a partner since he only shares the gross returns.  
  • “ … although there was no express agreement for partnership and no partnership was ever mentioned, yet there was a partnership formed between them, as evidence by what took place.”    
  • Means sharing of profits without any other facts being proved implies partnership but if it is one of several facts, then all the facts must be considered together and no particular weight should be given to the fact of profit sharing
  • Example: A lent RM 100 000 to a partnership firm and the loan was paid out of the profits of the business within the period of ten years.   Cox v Hickman (1890) 8 HL Cas 266, 11 Er 432 A trader unable to pay his creditor made an agreement with the creditor’s trustees that he will assigned his property to them and they were allowed to influence the conduct of the business. At the same time the trustees will be paid out of the profits.  Held: Such an arrangement does not constitute a partnership.    
  • Walker v Hirsch Plaintiff advanced a sum of money to H & Co and signed an agreement that Plaintiff would be paid a salary plus 1/8 of the profits. Plaintiff was previously a clerk and continued to discharge clerical duties in the company after the agreement.   Held: From the facts and circumstances, the court inferred that plaintiff did not have any right to interfere in the management and control of the business. Thus plaintiff was merely a servant and there was no partnership between the parties.    Chua Ka Seng v Boonchai Sompolpong [1993] 1 SLR 482 The plaintiff who worked on a part time basis with the defendant and later joined the defendant’s firm claimed to be the defendant’s partner. However, according to the defendant, the plaintiff was employed as a salaried partner and was only entitled to a remuneration of 20% of the firms net profits inclusive of salary and bonus. Held by the Singapore Court of Appeal: Plaintiff was merely a salaried partner.   Karthigesu J.: But if the participation in profits is only one among other circumstances to be considered, it is wrong then to say that the participation in profits raises a presumption of partnership which has to be rebutted by something else, in such all the circumstances must be considered in order to ascertain the real intention of the parties before any conclusion is drawn.
  • IRC v Lebus’s Trustees (1946) 1 AER 476 A deceased partner bequeathed his shares of profit in a firm to his surviving wife. Due to financial constraints, the surviving partner made no payment. The widow’s share of profits in that year was taxes by the Inland Revenue.   Held: The widow was not a partner in the business.    
  • Note: (iv) – is about loan, (i) – is about debt Re Young (1896) 2 QB 484 A and B entered into an agreement by which A will lend certain sum of money and payment will be made out of the profits. A was to assist the office, have control over the money advanced and empowered to draw bills of exchange. The issue here was A a partner?   Held: Not a partner.   Williams J.: I have read the agreement very carefully, and I have come to the conclusion that, taken as a whole, not withstanding the prima-facie evidence it affords, I ought not to hold that there was a partnership…inspite of those clauses which give such unusual and extended powers to Lloyd Jones, there was no intention of constituting a partnership.  
  • A person may sell his business to a firm together with his goodwill ( popularity of the business/good reputation) in exchange for a commission of the profits, but he is not a partner.   Pratt v Strick (1932) 17 T.C 459 A man sold his practice and goodwill to another. It was agreed that he would continue to generate goodwill for his purchaser for a certain period in return for a share of the profits.   Held: No partnership. No intention could be construed between the two men to establish a partnership.
  • 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.
  • 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 minors.   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 )  
  • 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 minority.    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 105 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.  
  • Imperial Loan Co. v Stone (18920 1 Q.B 599 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.  
  • 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.    
  • Tan Teck Hee & Ors v Cheng Tien Peng (1915) 2 FMSLR 161 Firm consisted 25 persons.   Held: 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 129 “… 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: 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.  
  • Definition & Formation of Partnership

    1. 1. Types of business organizationSources of lawDefinition of partnership
    2. 2. Sole proprietorshipPartnershipCompanyLimited Liability Partnerships @ Perkongsian LiabilitiTerhad (LLP or PLT)
    3. 3.  Partnership Act 1961(revised 1974)-based onEnglish Partnership Act 1890 Law of Contract principles
    4. 4.  Active partner Dormant/ Passive partner Salaried Partner Partner by estoppel/ holding out
    5. 5. Sec 3(1) of Partnership Act 1961Partnership is the relation which subsistsbetween persons carrying on business incommon with a view of profit
    6. 6.  Relation between persons Carrying on business in common View of profit
    7. 7. Relation An agreement or a contract between parties toform a partnershipV.C George J:A partnership is a contractual relationship whichsubsists between persons carrying on business incommon with a view of profit.Tan Eng Choon v Foo Kai Yuen
    8. 8. Wee Chong Jin J:Although this statutory definition does not statefrom what the relation arises it has been clearlyestablished that an agreement whether express orimplied is the source of the relation and it istherefore a relation resulting from a contract
    9. 9. Dr Rajan Sinha v Dr P.C. HermanPartnership can be created either by oral orwrittenPeh SweeChin J:I find that a partnership agreement in writing wasnot a condition precedent to the formation of thepartnership, but having regard to all thecircumstances, a mere form which all the partieshad decided to adopt
    10. 10. Persons Two < x < twenty. Sec 47(2) of PA 1961 & Sec 14(3)(b) of CA 1965 Except for professional, Sec 14(3)(a) of CA Natural or artificial(company), Sec 4 ofInterpretation Act 1967- persons includes a bodyof persons, corporate or unincorporated
    11. 11.  BusinessSec 2 of PA – includes every trade,occupation orprofession.Commercial activities or ventures with the purposeof profit
    12. 12.  A single act or undertaking could notamount to carrying on a businessSmith v AndersonSmith v AndersonBrett J: The expression of carrying on implies arepetition of acts…That series of act is to beseries of acts which constitutes a business. Compare with Windsor v SchroederWindsor v SchroederHeld: One commercial adventure undertaken by theparties would be considered as business and theparties were partners
    13. 13.  Carrying on-Means existing- Keith Spicer Ltd v MansellThe def and Mr.B agreed to carry on abusiness.The def ordered some goods to beused for the prospective business.Held: There was no evidence that def and Mr.Bcarried on business within the meaning of thePA.
    14. 14.  Chooi Siew Cheong v Lucky Height DevelopmentSdn BhdHeld: No partnership resulted from the jointventure agreement between a landowner and ahousing developer as each party intended awholly separate business.
    15. 15.  sharing profit of the business an important element in constituting a partnership. Profit means net profit i.e. the balance afterexpenditure/cost has been deducted- Sec 4(b));Sharing of gross return prima facie not apartnership. 
    16. 16. R v RobsonLord Coleridge :… the participation in profits essential to theEnglish idea of partnership.Re Spanish Prospecting Co. LtdFletcher Moulton LJ :Net profit means paying out of the receipts of abusiness, all the expenses incurred in obtainingthose receipts.  
    17. 17.  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 &AnorPeh Swee Chin J:In my view to find the existence of suchrelation, the Court must find the real intention of the partiesinvolved. The real intention is not necessarily the expressedintention of the parties so that even if the parties express theyare partners, the Court may decide to the contrary after theCourt considers all relevant factors taken together, refer to theleading case of Cox v. Hickman [1860] 8 HCL 268.
    18. 18.  Sec 4(a), 4(b) and 4(c),(c)(i) – (v) Provide detail explanation of Sec 3
    19. 19.  The above circumstances are not sufficient toconclude that there is a partnership between theparties who are joint tenant / joint owner. If there is a business on the property, there mightbe partnership in the business but not the property Partnership property is not to be presumed
    20. 20. A father left his two sons his business and threefreehold houses in equal shares as tenants incommon. They let one of them and employed theother in enlarging the workshops attached to the twohouses. They continued to carry on the business.They also shared the rent of the third house.Held: The brothers are partners in the business butnot as to the freehold houses. The property belongednot to the partnerships but to them as tenants incommon.
    21. 21. Cox v Coulson`Mr.Coulson was a theater manager who agreed with Mr.Millto provide his theater for one of Mill’s production. Under theagreement, Mr.C was to receive 60% of the gross takingswhilst Mr.M was to receive the balance 40%. The plaintiff(an audience)was shot during performances of one of thescenes. She sought to make Mr.C liable on the basis thatMr.C and Mr.M are partners and therefore liable for theincident.`Held: The claim is rejected because sharing of gross returnsdid not create a partnerships within the meaning of the PA.
    22. 22.  If a person receives share ofthe firm’s profit, prima facie, heis a partner.However, circumstances whereby sharingprofit does not qualify a person to be a partner: Sec4 (c)(i) –(v)
    23. 23. North J: …the receipt by a person of a share of theprofits of a business is prima-facie evidence thathe is a partner in it and if the matter stops thereit is evidence upon which the court must act. Butif there are other circumstances, they ought tobe considered fairly together, not holding that apartnership is proved by the receipt of a share ofprofits unless it is rebutted by some thing else…
    24. 24. Cox v HickmanCox v HickmanThe partnerships business was in financialdifficulties. The creditors appointed two trustees tomanage their interests in the partnerships. Theagreement was that upon full payment of thecreditors’ debt, the trustees will be out of the firm andreturn full management to the original partners. Mr.Hickman sought to make the two trustees liable aspartners of the firm.Held: Sharing of the gross return of the business didnot of itself make them partners. There was neitherrepresentation nor financial involvement whichindicate a partnership.
    25. 25. Chua Ka Seng v Boonchai SompolpongThe def was a partner in an architect firm, RSP of whichthe plf was an employee. The def later left the firm andset his own architect firm under the name CKS. The defrequested the plf to resign from RSP and work with himat CKS. The plf alleged that in their agreement, he willbe a partner who is entitle to 20% of the net profits. Thedef on the other hand claim that the plf was merely asalaried partner who was to receive 20 % of profitinclusive of salary and bonus.Held: The plf was only a “salaried partner” remuneratedby a 20% of net profits inclusive of salary and bonus.
    26. 26.  Annuity to widow or child out of thepartnership’s profit.IRC v Lebus’s TrusteesA partner of a firm involved in making furnituresbequeathed(through his will) his share of the profits tohis widow. In 1930, the widow’s share amounted to largesum but owing to a financial strategy, the firm wasunable to pay her the money. However, the widow wasassessed to income tax for that year. A question arise asto whether the assessment ought to include the sumrepresenting her shares in the profits of the business.
    27. 27.  Held: The widow was not a partner in the businessanf none of the assets of the firm belonged to her.
    28. 28.  Payment of a loan or interest of a loanout of profits Such contract is in writing & signed by all parties– lender is not a partnerRe Young L and Y entered into an agreement by which it isprovided that L should lend 500 pound to Y inconsideration for the payment to L of 3 pound per weekout of the profits of the business. L was also to assist inthe office and given some authority over the control ofthe firm’s money. Held: Despite the extensive power given to L , he is amere creditor and not a partner.
    29. 29.  Sale of goodwill in exchange for a shareof profitsPratt v StrickHeld: The fact that the plf share some profits ofthe business from the sale of goodwill, does notmake him a partner to the firm.* Refer to Exception 1 of Section 28 of ContractsAct 1950
    30. 30.  The word firm refers to partners– vice versaCases:Krishnan v Abdul Razak & AnorHeld: An action against the firm’s name is anaction against all the partners collectively
    31. 31. Minor partnerIllegal partnership
    32. 32. MinorPerson of unsound mind
    33. 33.  A minor can be a partner when there are otherpartners who are major. Liability: only major partners will be liable Upon attaining the age of majority can eitheraffirm or disaffirm his position as a partner.- if affirm; in M’sia, the partner will be liable forcontract entered during minority, however inEngland, he shall only be liable for contractsentered after the affirmation.
    34. 34. Held: A minor can be a partner of apartnership but can not be personallybe sued for the firm’s debt incurred bythe minor on behalf of the firm
    35. 35. Yong Yit Chong was one of the partners in thedef’s firm. He entered into the partnership whenhe was still a minor and ordered goods from theplaintiff company for the firm. When Yong attainedthe age of majority, he did not repudiate hisposition as a partner.
    36. 36.  Per Gill J:“ I now come to deal with the question of Yong YitChongs minority at the time of the formation of thepartnership and the effect of his ordering thegoods when he was still a minor… Under s. 200 ofthe Ordinance (Contracts), a person who is underthe age of majority according to the law to whichhe is subject may be admitted to the benefits ofpartnership, but cannot be made personally liablefor any obligation of the firm;…
    37. 37.  … A minor can be a partner in the limited sense thathe can be admitted to the benefits of partnership. Hisshare in the property of the firm, to the benefits ofwhich he is admitted, is liable for the obligations of thefirm, but he is not personally liable for suchobligations…If on attaining the age of majority he doesnot repudiate the partnership within a reasonable time,he becomes liable for all obligations incurred by thepartnership from the time he was admitted to thebenefits of the partnership.
    38. 38.  ..He (Yong) has since attained the age of majorityand has not up to now repudiated the partnership.He is therefore now equally liable for the goodswhich were purchased during his minority.
    39. 39.  Can enter into partnership if other partners knewabout his insanityImperial Loan Co v StoneHeld: An insane person can enter into a contractprovided that the other party knows about hisinsanity.
    40. 40. Reasons for illegality:1. The contract was entered for Illegal purpose –Refer to grounds for illegality –section 24 (a) –(e)CA 1950.
    41. 41. 2) Exceed number of partnersTan Teck Hee & Ors v Cheng Tien PengHeld: A formation of a firm of more than 20persons is forbidden by the law and therefore theparties are not entitle to claim.
    43. 43.  The Creditors issued a writ against Chop KwongFook Seng claiming monies due in respect ofcertain Contracts of Exchange; Chop Kwong FookSeng subsequently turned out to be an illegalpartnership as it consisted of more than twentypersons (prohibited and illegal under section 4 ofOrdinance 155 (Companies). The question is,whether or not the judgment should in thecircumstances have been entered against ChopKwong Fook Seng. Held: The illegality of the partnership affords noreason for refusing to make a Receiving Orderagainst a partner.
    44. 44. Per HUGGARD, CJ“It seems to me therefore that where two or morepersons are carrying on business under a firm name,… be sued in the firm name whether or not the firm islegally and properly constituted. It is stated in Lindleyon Partnership, 9th ed., at page 140, that "the illegalityof a partnership affords no reason why it should not besued," and I cannot find anything in the numerousauthorities to which I have been referred whichconflicts with this view…and in the circumstances Ican see no sufficient ground for refusing to make aReceiving Order against Chan Chan Phang who wasadmittedly the managing partner