Partnerships are one of the most popular forms of business organization apart from companies and cooperatives. Since a partnership involves more than one party, it is important for the partners to bind their relationship with a clear contract to facilitate the determination of the rights and obligations of each party. However, all partnerships whether made in writing or informally, are subject to the Partnership Act 1961.
When Does a Partnership Exist?
A Partnership Agreement is important for the parties to do business together for the purpose of making a profit.
Section 4 of the Partnership Act lists down matters to determine whether a partnership exists or otherwise, such as joint tenancy, tenancy in common, joint property, profit sharing and receipt of profit, employees, and receipt of annuity.
Liability in Partnership
The liability of the partners for the debts of the business is unlimited. Each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts. This is provided in Section 11 of the Partnership Act 1961.
The Importance of Partnership Agreement in a Business
Let’s say one partner wants the profit to be reinvested for business expansion but the other partner wants the profit to be divided. When each partner has equal power, it is highly unlikely that a solution will be reached.
Although it is not mandatory to state each part in writing, it is highly recommended to do so. When a conflict arises, the court will assume that the division of profits, losses, asset management and others to be divided equally.
Termination of Partnership Contract
The Partnership Contract can be terminated through three (3) ways, namely:
1. Dissolution on its own:
- by expiration of a fixed term;
- in the event of death of a partner or a partner is declared bankrupt;
- when a partner acted to allow his shares in the partnership to be mortgaged for payment of debts.
2. Termination by notice.
3. Dissolution by court.
CKY V L&W [1962] 28 MLJ 379
The plaintiff lent RM35,000 to her husband, who was a partner in a firm. The husband issued a receipt under the firm’s name and used the money to pay the firm’s debt. The Plaintiff took an action to recover her money but other partners refused to pay on the grounds that the plaintiff’s husband had no authority to borrow the money.
The court held that the Plaintiff was entitled in equity to recover the loan amount. Since the money was utilised by the firm for payment of the firm’s debts, it is regarded according to the principles of equity as if it had originally been borrowed by the firm.
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