TUTORIAL 10 : Topic – Partnership

1. Yvette and Robert are partners in a firm specializing in developing computer

software for small and medium enterprises (SMEs) called ‘SME Software Solutions
Co.’ In 2001, they borrowed RM 252,000 from Bank Usahawan to finance the
purchase of a new office in Cyberjaya.

In December 2004, Yvette and Robert agreed to admit Martin to the partnership
and signed a new agreement with Bank Usahawan. In the newly executed
agreement, it was stated that any remaining debts and obligations owed by the firm
to Bank Usahawan will be shared equally between Yvette, Robert and Martin.

Monthly instalments of the loan from Bank Usahawan have been unpaid since
March 2004 as the firm has been experiencing cash flow problems caused by poor
collection of their debts. In January 2005, Bank Usahawan commenced a lawsuit
against SME Software solutions Co. at the High Court of Malaya (Civil Division) in
Kuala Lumpur to recover the amount of the bank loan that remains unpaid from
the firm.

Two weeks after joining the partnership, Martin entered into a contract on behalf of
the firm with TREX Sdn Bhd for the purchase of RM 24,000 worth of office
equipment without telling the others. Yvette and Robert are not happy with this
contract as they feel the contract price for the office equipment is excessive.

In February 2005, Robert unexpectedly resigns from the partnership. Said, a

computer hardware supplier has traded with the partnership for many years.

(a) The lawyer representing Bank Usahawan told them that the partners are jointly
liable for any judgment debt obtained by Bank Usahawan arising out of the
unpaid bank loan. What does ‘jointly liable’ mean? (5 marks)

 Under Section 11 Partnership Act 1961, every partner in a firm is liable jointly with the
other partners for all contractual debts and obligations of the firm incurred while he is a
partner.
 A “joint liability” means the creditor has only one cause of action against all partners in
respect of the debt – Guiness Anchor Marketing Sdn. Bhd. V Chellam Joe Vetha Thya
Singh.
 Thus, if not all partners are sued, the creditor cannot later sue the other partners (not sued
earlier).
 Thus, Partners must be sued jointly together or the creditor sues using the firm’s name.
 Partners who are sued by the creditor will have to pay the full amount of the debt.
 They can seek contribution from the other partners.
 Third parties may sue all the partners or in the name of the firm.

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 (b) As a new partner, can Martin be made liable for the outstanding bank loan from
Bank Usahawan? (5 marks)

Issue
 The issue here is on the liability of Martin, a new incoming partner, for the debts of the
partnership incurred before he joins in, i.e. the outstanding bank loan.

Explanation of Law
 Under Section 19(1) Partnership Act 1961, a person who is admitted as a partner to an
existing firm is not liable to the creditors of the firm for anything done before he became a
partner, unless by special agreement with the existing partners that he shall be liable for the
previous debts.
 Creditors of the old firm (firm with the existing partners, without the new partner) have no
right under the special agreement against the incoming partner because they are not privy to
the agreement
 Creditors for those old debts can claim against the new firm if there is a ‘novation
contract’ entered into by the 3 parties i.e. the old firm, the new firm and the creditors.
 A novation contract is a new contract that substitutes an old, existing contract. The new
firm shall now be liable while the old firm is released from liability.

Application of Law
 On the facts, Bank Usahawan’s loan was taken in 2001. When Martin was admitted as a
new partner in December 2010, a new agreement in which all parties, i.e. Yvette, Robert,
Martin and Bank Usahawan, agreed that any remaining debts and obligations owed by the
firm to the bank will be shared equally between all three partners.
 Martin as a new incoming partner then has agreed to be liable for past debts of the firm,
which included the unpaid monthly instalments since March 2010.

Conclusion
 In conclusion, Martin can be held liable for the debts of the partnership incurred before he
joins in.

(c) Explain how Said should be notified of the changes to the partnership. (8 marks)

Issue
 The issue is on the notification to a third party (Said) of change of partnership’s constitution
when a partner (Robert) retires.

Explanation of Law
 Under Section 38(1) Partnership Act 1961, where a person (creditor) deals with a firm after
a change in the firm’s 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.
 Thus, a retiring partner will remain liable to customers and creditors who continue to deal
with the firm after his retirement unless he has given express notice to them of his
retirement
 Under Section 38(2), for new customers or creditors who have no dealings with the firm
before the retirement, it is sufficient for the firm to give notice of the partner’s retirement
by putting an advertisement in the Federal Gazette, Sabah Gazette and Sarawak Gazette.

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 However, for old, long-standing customers who have habitual or previous dealings with the
firm even before the partner retires, actual, express notice is necessary to specifically
inform them of his retirement.
 Advertisement in the newspapers or a mere notice to the Registrar of Business is not
sufficient notice.
 In Re Siew Inn Steamship Co. [1934] MLJ 180, the Court held that an advertisement
published in three local Chinese newspapers was not sufficient notice.
 This requirement was reaffirmed by the Supreme Court in Tan Sin Moh v. Lebel Ltd.
[1988] 2 MLJ 52 where it was held that a person who had habitual dealings with the
partnership was entitled to be specifically notified of the withdrawal of a partner from the
partnership. A mere notice of his withdrawal to the Registrar of Business was insufficient.

Application of Law
 On the facts, Said is a person who has traded with firm for so many years.
 It would not be sufficient for the partnership to merely advertise in the Gazzettes or
advertise in the local newspapers.
 Section 38(2) does not apply to Said.

Conclusion
 In conclusion, Said must actually be notified in writing or orally about Robert’s resignation.

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2. On 1 December 2007, Dennis, Eddie, and Fiona became equal partners in a jewellery
shop called ‘Gems for You’ (the firm), specialising in handcrafted gemstone jewellery
in Kuala Lumpur. The firm commenced business on 3 January 2008. In preparing for
the opening of the shop, the firm obtained a loan of RM1 million repayable over a
period of 12 years from Bank Bumi to facilitate the renovation of the shop and the
purchase of stock.

Clause 16 of the Partnership Deed provides that:

“Any contract which is worth more than RM100,000 can only be created on behalf
of the firm with the consent of all partners.”

Clause 30 of the Partnership Deed provides that:

“A person can be introduced as a partner if approved by a two-third majority vote.”

The firm was managed by Dennis, Eddie, and Fiona. On 2 July 2009, Fiona entered
into a contract to purchase a van at the price of RM150,000 from Good Motor Sdn
Bhd (Good Motor) without consulting the remaining partners.

Two years after the firm commenced business, Dennis and Eddie introduced Gabriel
as a new partner of the firm much to the disagreement of Fiona.

Based on the above facts, answer the following questions:

(i) Advise Dennis and Eddie whether the firm is liable for the contract which Fiona
entered with Good Motor. (9 marks)

Issue
 The issues are:
i. whether Fiona has apparent authority to bind the partnership firm to the contract with
Good Motor and
ii. whether the restriction on partners’ authority under Clause 16 was effective so that the
firm would not be liable for that contract.

Explanation of Law
 Under S.7 Partnership Act 1961, every partner is an agent of the firm and other partners for
the purpose of the partnership business.
 When a Partner incurs a contractual obligation, the firm and other partners are liable also if
the Partner acts within his authority.
 Even if there is no actual authority, a partner can still bind the firm if he acts within his
apparent authority.
 Apparent authority exists if a partner carries out any act which is usual in the kind of the
business run by the firm.
 Under Section 7 Partnership Act 1961, every partner is an agent of the firm and his other
partners for the purpose of the business of the partnership.
 The firm and the other partners are NOT bound by a partner’s act if
(i) the third party knows that the partner has no authority or does not believe the partner
has such authority, whether actual or apparent OR
(ii) the third party does not know or believe him to be a partner.

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 As held in Chan King Yue v Lee & Wong, a partner would have the authority to borrow
money on behalf of the partnership. The loan was an act necessary for the carrying on of
the partnership business, i.e. used to pay off its debts. Thus, the firm and the partners were
bound.
 Where partners have imposed restrictions on the authority of a partner, under Section 10,
the contract entered into with a third party in breach of that restriction will not be binding
on the partnership if the third party has notice of the restriction.
 If the third party does not know of such restrictions, the firm shall still be bound by an act
done in contravention of the restriction.

Application of Law
 On the facts, the agreement entered with Good Motor is worth RM150,000/-. Under Clause
16, Fiona had no authority to enter into such contract.
 The purpose for which Fiona purchased the van is also important. If the van is purchased to
assist in the carrying out of the firm’s business, then this is an act which is usual in the kind
of business run by the firm.
 There is no indication that Good Motor is aware of Clause 16.

Conclusion
 In conclusion, Fiona has apparent authority and the partnership firm is liable for the
contract entered into by her even though the act was done in contravention of Clause 16.

(ii) Advise Fiona as to whether she can challenge the introduction of Gabriel as a
new partner of the firm. (5 marks)

Issue
 The issue is whether Gabriel may be introduced as a new partner into the firm without the
consent of all existing partners.

Explanation of Law
 The rights and duties of partners are usually governed by partnership agreements.
 Section 26 Partnership Act 1961 will apply in the absence of specific provisions in the
partnership agreement.
 Section 26(g) provides that no person may be introduced as a partner without the consent of
all existing partners.

Application of Law
 On the facts, the partners have expressly excluded the application of Section 26(g), as seen
by Clause 30 of the Partnership Deed.
 Clause 30 provides that a person can be introduced as a partner if approved by a two-third
majority vote.
 As the partners are equal partners, with Dennis and Eddie’s vote, it would appear that
Gabriel is admitted into the partnership by a two-third majority vote.

Conclusion
 In conclusion, Fiona is advised she cannot challenge the introduction of Gabriel as a new
partner. Gabriel may be brought in as a new partner without her consent.

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3. In January 2012, Hyosung set up a bakery called “Secret Cake House” (“SCH”) in
partnership with her friends Zinger and Jieun. To facilitate the renovation of the
shop and the purchase of stock, in February 2012, the partnership obtained a loan of
RM100,000 from Bank TSE (“Bank TSE loan”).

Hyosung had a lot of ideas on the business but her partners often rejected her ideas,
leading to a lot of disagreements. She became frustrated. So, in June 2012, Hyosung
started a new bakery with her friend, Hoya, called “Infinite Bakery”. At the same
time, Hyosung was approached by another former classmate, Yejin, to run a beauty
salon “Ailee Girl”. When Hyosung informed Zinger and Jieun, they got angry and
quarreled.

However, Hyosung continued with her two extra businesses. She spent less and less
time with the partnership. By December 2012, “Infinite Bakery” made a profit of
RM20,000/- and “Ailee Girl” made a profit of RM30,000/-. On the other hand, SCH
suffered a huge drop in business and experienced further financial problems.

Relationship between Hyosung and her partners took a turn for the worse, and in
December 2012, the partners agree that Hyosung shall retire from the partnership,
to be replaced by Sunhwa. By an agreement signed between Hyosung, Zinger, Jieun
and Sunhwa, it was agreed that Sunhwa would assume liability for the Bank TSE
loan of RM100,000/-, and Hyosung would no longer be liable. However, no separate
agreement was signed with Bank TSE.

Meanwhile, Masimo Flour Mills (“Masimo”), a major creditor that has dealt with
the partnership for more than 10 years, was also not notified about Hyosung’s
retirement. It was only informed of Sunhwa’s admission as a new partner when
Sunhwa signed on a few purchase orders. In mid-January 2013, Masimo supplied
RM50,000/- worth of flour to the partnership (“Masimo debt”).

Advise Hyosung on the following:-

a. Sunhwa’s liability for the debts of the partnership, i.e. Bank TSE’s loan of
RM100,000/- and the Masimo debt of RM50,000/-. (Incoming/new Partner)

 The issues are on Sunhwa’s liabilities for:

- the new debts incurred after she joins the partnership, i.e. the Masimo debt of RM50,000/-
and
- the previous debts incurred before she joins the partnership, i.e. the Bank TSE’s loan of
RM100,000/-

Sunhwa’s liability for new debts of the firm (after joining)

 A person who is admitted as a partner to an existing firm immediately assumes full liability
as a partner.
 Thus, generally, Sunhwa will be liable for the debt of RM50,000/- owed to Massimo.

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Sunhwa’s liability for previous debts of the firm (before joining)

 The incoming partner is not liable to the creditors of the firm for anything done before she
became a partner unless by special agreement with the existing partners that she shall be
liable for the previous debts - s. 19 (1).
 Creditors of the old firm have no right under the special agreement against the incoming
partner because they are not privy to the agreement.
 Creditors for those old debts can claim against the new firm if there is a ‘novation
contract’ entered into by the 3 parties i.e. the old firm, the new firm and the creditors.
 A novation contract is a new contract that substitutes an old, existing contract. The new
firm shall now be liable while the old firm is released from liability.
 On the facts, the Bank TSE loan of RM100,000/- was incurred before Sunhwa joined the
partnership.
 By the agreement signed when Sunhwa joined the partnership, it was agreed that Sunhwa
would assume liability for the Bank TSE Loan and Hyosung would no longer be liable.
However, no separate agreement was signed with Bank TSE.
 Therefore, Sunhwa, the incoming partner is not liable to Bank TSE for the RM100,000/-
loan since there is no novation contract entered into by all parties.
 The 2nd partnership agreement was a special agreement made between Sunhwa and the
existing partners.
 Sunhwa will only be liable to the partnership for the Bank TSE Loan, while Bank TSE has
no right under the special agreement against Sunhwa because it is not privy to the
agreement.

b. Hyosung’s liability for the Bank TSE loan of RM100,000/- and the Masimo debt
of RM50,000/-.
(Retiring/outgoing partner: Textbook pg 155-156, 5-198-199)

 The issues are on Hyosung’s liabilities for:

- the previous debts incurred before she retired from the partnership, i.e. the Bank TSE loan
of RM100,000/-
- the new debts incurred after she retired from the partnership, i.e. the Masimo debt of
RM50,000/-.

Hyosung’s liability for previous debts of the firm (before retirement)

• A partner who retires from a firm remains liable for the firm’s debts and obligations
incurred before his retirement - s. 19(2).
• She may be released from her existing liabilities if a novation contract is signed between
himself, the partners of the newly-constituted firm and the affected creditors - s. 19 (3).
• On the facts, the Bank TSE loan of RM100,000/- was incurred before Hyosung retired from
the partnership.
• By the 2nd partnership agreement signed when Hyosung retired from the partnership and to
be replaced by Sunhwa, it was agreed that Sunhwa would assume liability for the Bank
TSE Loan and Hyosung would no longer be liable. However, no separate agreement was
signed with Bank TSE.
• Therefore, Hyosung remains liable for the Bank TSE’s RM100,000/- loan since it was
incurred before her retirement and there is no novation contract entered into by all parties.

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Hyosung’s liability for new debts of the firm (after retirement)

• A retiring partner will remain liable to customers and creditors who continue to deal with
the firm after his retirement unless he has given express notice to them of his retirement – s.
38 (1).
• For new customers or creditors who have no dealings with the firm before the retirement, it
is sufficient for the firm to give notice of the partner’s retirement by putting an
advertisement in the Federal Gazette, Sabah Gazette and Sarawak Gazette – s. 38 (2).
• However, for old, long-standing customers who have habitual or previous dealings with the
firm even before the partner retires, actual, express notice is necessary to specifically
inform them of his retirement.
• Advertisement in the newspapers or a mere notice to the Registrar of Business is not
sufficient notice. Re Siew Inn Steamship Co [1934] MLJ 180, Tan Sin Moh v Lebel Ltd
[1988] 2 MLJ 52, Ang Lay Sim v Choo Lay Poh [2004].
• In Re Siew Inn Steamship Co. [1934] MLJ 180, the Court held that an advertisement
published in three local Chinese newspapers of the dissolution of the partnership was not by
itself sufficient notice to those who have had previous dealings with the firm and had not
actually seen it although they may be regular subscribers to the newspapers.
• This requirement was reaffirmed in 2 other cases Tan Sin Moh v. Lebel Ltd. [1988] 2 MLJ
52 and Ang Lay Sim v Choo Lay Poh [2004], which held that a person who had habitual
dealings with the partnership was entitled to be specifically notified of the withdrawal of a
partner from the partnership. A mere notice of his withdrawal to the Registrar of Business
was insufficient.

 On the facts, Masimo is a major creditor that has dealt with the partnership for more than
10 years. It was not notified about Hyosung’s retirement.
 As an old, long-standing creditor who has habitual or previous dealings with the firm before
Hyosung retires, actual, express notice is necessary to specifically inform Masimo of
Hyosung’s retirement.
 Therefore, Hyosung remains liable to Masimo since it continues to deal with the
partnership after her retirement since neither she nor the partnership have given express
notice to them of her retirement. She will still be liable for the Masimo debt of RM50,000/-.

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 c. Whether Hyosung has breached her duties as a partner.
(Section 31 for opening “Ailee Girl”, Section 32 for opening “Infinite Bakery”:
Textbook pg 144-145, 5-152)

Identification of issue

 The issue is whether Hyosung has breached her duties under:

- Section 31 Partnership Act 1961 when she continued to run a beauty salon “Ailee Girl”
and
- Section 32 Partnership Act 1961 when she continued to run a new bakery, “Infinite’
Bakery” in the same locality as her firm without her partners’ consent.

Explanation of Law

 Under Section 31 Partnership Act 1961, every partner must account to the firm for any
benefit derived from her, without the consent of the other partners, from any transaction
concerning the partnership or from any use by her of the partnership property, name, or
business connection.
 Under S.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, she must account for and pay
over to the firm all profits made by her in that business.

Application of Law

 On the facts, Hyosung has not obtained consent from all partners when she opened
“Infinite’ Bakery” with her sister and when she opened “Ailee Girl” beauty salon with
Yejin.
 Although Ailee Girl is not of the same nature as SCH, Hyosung could be said to be making
use of the partnership name or business connection for her own benefit.
 Meanwhile, Infinite bakery is of the same nature as SCH and as such, Hyosung has carried
on a business in competition with her own firm.

Concluding advice

 In conclusion, Hyosung is advised that she has breached her duties under Section 31 and 32
PA 1961 by opening a new beauty salon and a bakery without obtaining the other partners’
consent.
 She would be liable to pay over all the benefits derived from any transactions concerning
the partnership.
 Thus, she is liable to pay over to SCH the profit of RM20,000/- made by Infinite Bakery
and the profit of RMM30,000/- made by “Ailee Girl”.