partnership-relationship between partners

Ch.3: Relationship Between Partners

Contents

I. Relationship between partners is based on the contractual agreement

between them........................................................................................................2

ii. Duties of partners.......................................................................................2

iii. Rights of partners (section 26)...................................................................6

iv. Rights of assignee of share in partnership................................................11

v. Concept of partnership property...............................................................12

vi. 3 ways of identifying p’ship property:.....................................................13

vii. Procedure againat partnership property....................................................15

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I. RELATIONSHIP BETWEEN PARTNERS IS BASED ON

THE CONTRACTUAL AGREEMENT BETWEEN THEM

A. S 21: VARIATION ON TERMS OF The mutual rights and duties of partners, whether ascertained by agreement or defined

by this Act, may be varied by the consent of all the partners, and such consent may be

either express or inferred from a course of dealing

B. CRUIKSHANK V SUTHERLAND (1923) 128 LT 449 Facts : The accounts of the partnership were prepared based on book value as the

assets were taken over from a previous firm was based on book value. fair value of

assets or book value.

Isu : When the plaintiff died, the issue was whether his share of the partnership’s

profit should be based on, (using fair value/book value.)

Held : fair value as no course of dealing had been proved to show that the value

should be book value.

II. DUTIES OF PARTNERS

A. CONCEPT

1. Partners stand in a fiduciary relationship with one another. …based

on an ‘uberrimae fidei’ type of contract, a contract that places a duty on

partners to display utmost good faith in all dealings and matters affecting the

partnership.

2. The concept of good faith and honesty of a fiduciary’s duty under

Partnership Act 1961 can be seen in the below sections.

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B. S. 30: TO RENDER TRUE ACCOUNTS AND FULL INFORMATION

1. Provision: ….. information of all things affecting the partnership to

any partner or his legal representatives

2. When one partner is dealing with another partner in a situation where

he has access to certain information regarding the matter they are dealing in

which is not known to the other, the one having information has a duty to act

in good faith. .. to disclose it in full to the other.

3. However, if the partner who has a right to the information is

a) aware that such information is withheld from him, or

b) he willfully or negligently acts in such a way that shows that he

will not make any claims,

c) then there is no duty of disclosure & the contract between the

partners is considered valid and the partner will lose all claims against

the other partner. This was established in : Law v Law [1905]

Facts : A partner sold his share in the partnership to another partner for

£21,000. At the time of sale he did not know that the partnership assets

included mortgages and other securities. The buyer knew of this but

never told him about it. The seller took legal action to have the contract

he had made, be declared void.

Hekd : the order setting aside the contract would have been made.

However, a settlement out of court has been agreed to by the parties

involved

4. Duty not only between existing partners, but also to those intending to

enter into partnership, meaning future partners.

a) Fawcett v Whitehouse (1829)

Facts : A future partner had negotiated to buy a piece of property for

a firm that was to be established. He was paid a commission for his

effort.

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Held : he had to surrender the commission to the firm after the firm

was established

C. S. 31: NOT TO MAKE SECRET PROFIT / TO ACCOUNT FOR ANY

BENEFIT DERIVED FROM ANY TRANSACTION CONCERNING THE

PARTNERSHIP

1. Provision : A partner must not, without the consent of the other

partner, make any profit or benefit for himself by making use of his position or

any information(name or business connection) that he had obtained in the

partnership business.

2. Advantage or benefit obtained without consent, is said to be secret

profits. Partner under a fiduciary duty to other partners, not to make any secret

profit out of their position.

3. A partner can keep his profits only when his partners give their full

consent.

a) But firstly, the partner must make a full disclosure to his co-

partners of all relevant facts relating to the acquisition of the profit

before the co-partners can be said to be in a position to give consent.

4. Pathirana v A.Pathirana [1967]

Facts : Both A and AP were running a petrol station as agent of Caltex. On

1948, AP gave 3 months’ notice to dissolve the partnership. Before the notice

expired, P informed Caltex that his partnership with AP had ended. Without

the knowledge and consent of the AP, P managed to persuade Caltex to have

the agency changed to his name after one month AP gave the notice, which is

still within the period of 3 months’ notice. AP claimed a share of the profits to

which he was still entitled.

Held : AP was entitled to the profits as the P had obtain the renewal of the

petrol supply agreement before the partnership had ended.

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D. S. 32: DUTY NOT TO ALLOW CONFLICT OF INTERESTS/ TO

ACCOUNT FOR PROFIT DERIVED FROM A COMPETING BUSINESS

1. Provision : If a partner, without the consent of the other partners,

carries on any business of the same nature as and competing with the firm, he

must account for and pay over to the firm all profits made by him in that

business.

2. where a person has his own personal business which is of the same

nature with that of his partnership business, his personal interest and his

interest as a partner would be seen to be competing and therefore, in

conflict.

a) if it is the same, but it is not competing, it will not be against

s.32, if it is the same, but it is not competing, it will not be against s.32.

3. Even if the business is the same and competing, it can be carried on

if the other partners give express or implied consent.

Case Facts n issue Held

Trimble v

Goldberg

[1906]

T, G and B set up a partnership for the

purpose of buying & selling certain

properties belonging to one Hollard.

Trimble went out to S. Africa and bought

the Hollard’s property for the firm as

agreed.

At the same time time T also brought

some plots of land from Sigma Syndicate

for himself and B.

When G learnt about this, he brought an

action against T for the benefit that he had

gained.

the action failed as the

purchase of the plots of land

was not within the scope of

the partnership, nor was it in

competition with the

partnership business.

Aas v

Benham

[1891]

A partner of a firm of shipbrokers called

‘H. Clarkson & Co.’ later wanted to form

a separate business as a ship-owner under

the name of ‘H. Clarkson & Co., ship

• defendant cannot use name

of the business because the

new business was beyond the

scope of, and

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owning’.

The other partner brought an action to

stop him from using the name of the firm

in a separate business, and claimed an

account of his profits and salary in

connection with the new co.

• The new business is not in

competition with the

partnership business, thus

defendant did not have to

account for the benefit or

profit he had made in

connection with the new co.

III. RIGHTS OF PARTNERS (SECTION 26)

The rights of partners under s. 26 are based on the common law assumption -that

in a partnership, everything is enjoyed or shared equally.

Rights under will apply to the partnership if there is no express agreement between

the partners

A. 26 (A) : CAPITAL & PROFIT

1. Provision : Subject to any agreement express or implied between the

partners, all the partners are entitled to share equally in the capital and profits

of the business, and must contribute equally towards the losses of capital or

otherwise sustained by the firm

2. Interpretation :

a) ‘equally’: If capital is contributed in unequal amounts, it is

implied that an agreement exist among the partners that their rights to

capital will be based on the ratio of their contributions

b) Where the capital provided in different forms, e.g.; A provides

the money and B provides skill or knowledge, the skill or knowledge

of such partner would be considered as equally between them. If the

partners do not want it to be considered as equal, may make express

agreement as to how the profits are to be divided bet. them.

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3. Re Albion Life Assurance Society (1880) : In ordinary partnership

businesses, where there is a share of the profits in certain amounts, it could

thus be fairly concluded that the losses would be divided in the same

proportion.

a) If one of the partners become insolvent and is not able to

contribute his share of lost capital, the solvent partner is not under any

duty to contribute his share of lost capital, the solvent partner is not

under any duty to contribute for him.

B. S 26 (B) (I) & (II) :INDEMNITY AGAINST LIABILITY IN THE FIRM'S

BUSINESS

1. Subject to any agreement (Section 22) express or implied between

the partners, 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

(ii) In or about anything necessarily done for the preservation of the business

or property of the firm;

2. Kok Hong Leong v Seow Kah Cheng [1950]

Facts : Firm had defended action brought by third party who obtained $1 in

damages, with each side ordered to pay own costs.

Held : Defending third party’s action was preservation of firm’s assets, thus

partner is entitled to receive from partnership expenses incurred in performing

the duty.

C. S. 26 (C) : ADVANCES TO THE FIRM MADE BY A PARTNER

1. Provision : Subject to any agreement between the partners,

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a partner making any actual payment or advance beyond the amount of

capital which he has agreed to subscribe for the purpose of the

partnership

is entitled to interest at the rate of 8% per annum from the date of the

payment or advance

2. Explanation :

Where the partners have originally agreed to certain amounts to be

contributed by each partner as capital.

When the sum contributed by one or more of the partners is less, and

the full capital is not achieved, one of the partners may contribute more

than the agreed amount.

The advance made by a partner above and beyond the amount he has

agreed to contribute to the capital is considered as a loan, and not as

an increase of his contribution to the capital. As such interest ought

to be paid. The rate of interest however may vary by agreement.

D. S 26(D): INTEREST ON CAPITAL

1. Subject to any agreement between the partners,

a partner is not entitled, before the ascertainment of profits, to interest

on the capital subscribed by him

2. Interpretation : kalau partner nak tuntut interest, kena tggu

pembahagian untung selesai dulu

E. S. 26(E) : MANAGEMENT OF THE PARTNERSHIP BUSINESS

1. Provision : Subject to any agreement between the partners, every

partner may take part in the management of the partnership business.

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2. It would be best for the firm to make provisions to appoint those

partners who are suitably qualified by seniority or ability to manage the

business to manage the firm. They probably could be paid a salary, or, as an

alternative, the firm may engage a manager to run the partnership business.

F. S 26(F) :REMUNERATION


every partner may take part in the management of the partnership

business.

2. This provision may not be fair in a partnership where there are sleeping

and active partners, thus an agreement may be drawn up to provide the

payment of a retainer to the active partner.

3. However, during a winding-up of the partnership, where one of the

partners die, or retire, or becomes of unsound mind, then the partner or

partners left to sort out the business should also be compensated.

G. S.26(G) INTRODUCTION OF A NEW PARTNER


no person may be introduced as a partner without the consent of all

existing partners

2. A partnership agreement can provide that one or more of the

partners have the option of introducing a new partner.

a) If there is such an agreement, then the other partners are bound

to accept the introduction of new partner.

b) A person who has been nominated as a partner as allowed

under the partnership deed, has

c) a right of action when other partners refuse to admit him.

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3. Byrne v Reid [1902]

Facts :A father nominated his son as partner as allowed under a partnership

deed, but other partners refused to admit the son. Later they agreed to execute

all deeds necessary for his son’s admission. However, they did not fulfill their

promise. The son sued them.

Held : partners were bound by partnership deed. The son was a partner in the

eyes of the law upon nomination and therefore could exercise his rights as

such.

H. 26 (H) DIFFERENCES AS TO ORDINARY MATTERS

1. Provision : 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

2. Highley v Walker (1910)

Held : the decision to admit an apprentice to be trained in the firm’s business

was an ordinary matter that could be decided by a majority of the partners,

thus allowing the partner’s son to be admitted.

I. S 26(I) : ACCEES TO THE PARTNERSHIP BOOK


the partnership books are to be kept at the place of business and

every partner may when he thinks fit, have access to and inspect

and copy any of the them.

2. Partnership books would include all records kept by the partnership on

the firm’s affairs such as accounting records, minutes of their meetings, etc.

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J. SECTION 27 : RIGHT TO EXPEL PARTNERS

1. Provision : No majority of the partners can expel any partner, unless a

power to do so has been conferred by express agreement between the parties.

2. Where there is such a provision, such as in cases where a partner has

obviously breached the partnership deed, then a notice of expulsion can be

served on the partner who has misbehaved, without first having to tell

him about his misdeed.

a) Green v Howell [1910]

Facts :The partnership articles of a firm contained a provision that

allowed one partner to expel another partner who is in obvious breach

of his duty. This, however, is subject to an appeal to an arbitrator. The

other partner then served a notice of expulsion on his partner without

giving him an opportunity to explain as he felt his partner was guilty of

being in breach of the partnership articles. The issue here was the

notice valid?

Held : The court held that the notice was valid.

IV.RIGHTS OF ASSIGNEE OF SHARE IN PARTNERSHIP

A. CONCEPT

When a partner assigns his share in the partnership to another party, it does

not make the other party a partner, but the assignee is merely assigned the

partner’s rights in the partnership assets and profits

B. S 33(1): An assignment by any partner of his share in the partnership does not entitle the

assignee to interfere in the management or administration of the partnership

transactions, or to inspect partnership books during the continuance of the partnership

C. S. 33 (2) Assignee has 2 rights when firm is dissolved:

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to assignor’s share;

to an account as from the date of dissolution to ascertain that share.

D. WATTS V DRISCOL Facts : A partner assigned his share in a firm to his father as security for a loan his

father gave him to set up the firm. He then sold his share to the other partner. The

father claimed he was entitled to an account to ascertain the value of his son’s shares.

Held : the sale to the other partner did not affect an assignee’s rights since the sale

took place without his consent.

V. CONCEPT OF PARTNERSHIP PROPERTY

A. IMPORTANCE & MEANING In Mat Shah bin Mohamed & Anor v Foo Say Meng & Ors [1984]1 MLJ 237, Wan

Suleiman F.J. considered 3 reasons why it is important to determine Partnership

property:

1. It’s value - to firm or partner.

2. Creditors right in event of firm’s insolvency.

3. To those who take partner’s real estate or personal estate.

a) selalu jadi isu apabila tanah didaftarkan atas nama partner,

adakah firm n other partners boleh claim itu partnership property?

B. S. 22(1) : ALL PROPERTY BOUGHT USING PARTNERSHIP

ACCOUNT IS A PARTNERSHIP PROPERTY

1. Provision of 22 (1): All property/rights/interests in property originally

brought into the partnership stock on account of the firm or for the purposes

and in the course of the partnership business, are called as partnership property

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VI. 3 WAYS OF IDENTIFYING P’SHIP PROPERTY:

A. ALL PROPERTY BROUGHT IN ORIGINALLY AS PARTNERSHIP

STOCK.

1. The question of whether the property has been originally brought in as

partnership stock or not depends on the agreement between the partners.

Case Facts HeldMiles v Clark

A photographer who ran a sole enterprise brought in the plaintiff as partner as he had more business contacts.

He allowed his equipments to be used in the cause of the photography partnership, without any definite agreement between them.

Despite the business doing well, they ended the partnership over some differences.

assets such as the lease of the business premise, photography equipments, and the firm’s ‘goodwill’ were not partnership property,

but the personal property of the partners who had brought them into the partnership.

B. WHERE PROPERTY IS ACQUIRED THOUGH PURCHASE OR OTHER

MEANS, FOR THE FIRM.

1. This is normally where the purchase is made using partnership money

and property for the firm. This is a much easier way of determining

partnership property.

2. S. 23 : Unless the contrary intention appears, property bought with

Partnership Money is deemed to have been bought for the firm.

C. WHERE PROPERTY IS ACQUIRED THROUGH ANY LAWFUL MEANS

FOR ALL MEANS AND PURPOSES FOR THE PARTNERSHIP BUSINESS. TO

THE FIRM

1. Concept : Not all property bought that is used in the partnership

business is assumed to be partnership property.

Case Facts Held

Ponnukon v Appellant entered into land was not partnership property because

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Jebaratnam partnership with the

respondent to build houses

and shops for sale, and to

share such profits. Land in

question was owned by

him.

(i) no agreement between parties for land to be

treated as partnership property;

(ii) object to develop land does not necessarily

mean land must be owned by the firm;

(iii) land was not paid from partnership money.

D. DEVOLUTION (PENURUNAN KUASA) OF PARTNERSHIP PROPERTY

1. Proviso of S. 22 (1)

a) Provision : Provided that the legal right/interest in any land

which belongs to the partnership shall devolve according to

the nature and tenure 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.

2. Section 24

a) Provision: Where land / interest has become partnership

property, it shall be treated

as between the partners (including the representatives and hiers

of a deceased partner),

and also as between the heirs of a deceased partner and his

executors or administrators, as personal and not real estate

UNLESS the contrary intention appears,

b) Interpretation :

Once if it is proven to be partnership property, even though the

property registered under a partner’s name, land law would not

be applicable

A property cannot be registered under the firm’s name because

partnership is not a legal entity

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E. CO-OWNERS OF ESTATE IN LAND S 22(2)

1. Provision : Where co-owners of an estate/interest in any land are

partners as to profits made by the use of that land, and purchase other land in

the absence of any agreement to the contrary, not as partners, but as co-owners

for the same respective estates and interests as are held by them in the land

first mentioned at the date of the purchase.

Remain as co-owners n not partners

2. Davis v Davis [1894]

Depe bangunkan bisness guna duit sewa rumah.

Apa2 penambahan daripada harta co-owners menyumbang kepada adalah

harta perkongsian tapi the freehold house remain as their personel property.

VII. PROCEDURE AGAINAT PARTNERSHIP

PROPERTY

A. S. 25 (1) : WRITS OF EXECUTION

1. Provision ; A writ of execution shall not issue against any partnership

property except on a judgment against the firm

2. Interpretation : walaupun perkongsian tak boleh memiliki harta tapi

apa2 action against partnership such as bankruptcy metilah merujuk kepada

partnership property bukan kepada individu.

3. Peake v Carter

4. Brown, Janson v A Hutchinson (N0 2) [1895]

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B. S. 25 (2) : CHARGING ORDER

1. Provision : The court may on the application by summons of any

judgment creditor of a partnership property:

a) make an order charging that partner's interest in the partnership

property

b) appoint a receiver of that partner’s share of profits and give all

other orders which might have been directed or given if the charge had

been made in favour of the creditor

2. Interpretation of S. 25 (2): Kalau partner A ada buat personel loan

and securd the loan with his share in the partnership property. Mahkamah can

order only his part in the property can be claimed by the claimant, plus court

may give any order necessary to uphold creditor’s right.

3. S 35(2): other partners have the option to dissolve the firm if any

partner suffers his share of the partnership property to be charged for his

separate debt.

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