What Is a Partnership under Malaysian Law?
A partnership is one of the simplest ways to carry on business in Malaysia. Under section 3 of the Partnership Act 1961, a partnership exists when two or more persons carry on business in common with a view to making profit. Unlike a company, a partnership is not a separate legal entity from its partners. This means partners are personally liable for the debts and obligations of the firm.
Partnerships can be formed with or without a written agreement. However, the absence of a written partnership agreement often becomes a source of conflict when disputes arise, as parties may have different understandings of their respective rights, contributions and profit shares.
Common Causes of Partnership Disputes
Partnership disputes can emerge for many reasons. Understanding the common causes may help business owners recognise warning signs early.
Disagreements over Profit Sharing
Where there is no written agreement specifying profit shares, section 26 of the Partnership Act 1961 provides that partners are entitled to share equally in the profits of the business and must contribute equally towards losses. Disputes arise when one partner believes their contribution or effort entitles them to a larger share than the statutory default.
Breach of Duties
Partners owe each other duties of good faith and honesty. Section 31 of the Partnership Act 1961 requires partners to render true accounts and full information on all things affecting the partnership. Section 32 obliges a partner to account for any benefit derived from transactions concerning the partnership or from the use of partnership property, name or business connection. When a partner secretly competes with the firm or diverts business opportunities for personal gain, this constitutes a serious breach.
Mismanagement and Decision-Making Conflicts
Under section 26, differences on ordinary matters connected with the partnership business are decided by a majority of partners. However, no change can be made to the nature of the partnership business without the consent of all partners. Disagreements over the strategic direction of the business, major expenditure or the admission of new partners frequently give rise to conflict.
Financial Irregularities
Disputes often arise when one partner suspects another of misappropriating partnership funds, failing to maintain proper accounts, or incurring unauthorised debts on behalf of the firm.
A Partner's Right to Accounts and Information
Access to accurate financial information is fundamental to protecting a partner's interests. The Partnership Act 1961 provides important safeguards in this regard.
Right to Inspect Books
Section 27 of the Partnership Act 1961 states that the partnership books are to be kept at the place of business of the partnership, and every partner may have access to and inspect and copy any of them. This right cannot be excluded by the other partners. If a partner is being denied access to the books or records, this may itself be grounds for seeking court intervention.
Duty to Render True Accounts
Section 31 imposes a positive obligation on partners to render true accounts and full information on all things affecting the partnership to any partner or their legal representatives. A partner who suspects financial wrongdoing can demand a full accounting. If this is refused, the court may order an account to be taken.
Account of Profits for Breach
Where a partner has derived secret profits or benefits in breach of their fiduciary duties, the other partners may seek an account of those profits. The court can order the wrongdoing partner to pay over any amounts improperly received.
Dissolution of a Partnership
Dissolution brings the partnership relationship to an end. The Partnership Act 1961 sets out the various ways in which a partnership may be dissolved.
Dissolution by Agreement or Notice
Partners may agree to dissolve the partnership at any time. Where the partnership is for an undefined period, section 29 allows any partner to dissolve the partnership by giving notice of their intention to do so to all other partners. The partnership is then dissolved from the date specified in the notice, or if no date is specified, from the date of communication of the notice.
Automatic Dissolution
Section 36 provides for dissolution in certain circumstances without any action by the partners. A partnership is dissolved by the death or bankruptcy of any partner, unless there is an agreement to the contrary. A partnership entered into for a fixed term is dissolved when that term expires. A partnership entered into for a single venture or undertaking is dissolved when that venture or undertaking is completed.
Dissolution by the Court
Under section 37, a partner may apply to the court for dissolution on several grounds. These include:
- A partner becoming permanently incapable of performing their part of the partnership contract
- A partner's conduct being prejudicial to the carrying on of the business
- A partner wilfully or persistently breaching the partnership agreement, or otherwise so conducting themselves that it is not reasonably practicable for the other partners to carry on business with them
- The business can only be carried on at a loss
- Circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved
The just and equitable ground gives the court broad discretion and may be invoked where there has been a complete breakdown of trust and confidence between the partners.
Winding Up Partnership Affairs
Once a partnership is dissolved, its affairs must be wound up. This involves collecting the partnership assets, paying off debts and liabilities, and distributing any surplus among the partners.
Authority to Wind Up
Section 42 of the Partnership Act 1961 provides that after dissolution, the authority of each partner to bind the firm continues so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of dissolution. However, the firm is not bound by the acts of a partner who has become bankrupt.
Application of Partnership Property
Section 47 sets out the order in which partnership property is applied on dissolution. First, the debts and liabilities of the firm to persons who are not partners must be paid. Second, each partner is entitled to be repaid their advances as distinct from capital. Third, each partner is entitled to be repaid their capital contribution. Finally, any residue is divided among the partners in the proportion in which profits are divisible.
Settling Accounts between Partners
Where partners cannot agree on how to settle accounts between themselves, either party may apply to the court for an order that accounts be taken. The court can appoint a referee to examine the partnership books and determine what is owing between the partners.
Return of Premiums
Section 45 provides that where a partner has paid a premium upon entering into a partnership for a fixed term and the partnership is dissolved before the expiration of that term, the court may order repayment of the whole or part of the premium, having regard to the terms of the partnership agreement and the length of time the partnership has continued.
Practical Considerations for Partners in Dispute
Partners facing a dispute should take certain practical steps to protect their position. Gathering and preserving documentary evidence, including partnership accounts, bank statements and correspondence, is essential. Partners should also consider whether any interim relief may be necessary to prevent dissipation of partnership assets or to restrain a partner from acting in breach of their duties.
Where the relationship has broken down, partners may wish to explore whether a negotiated exit or buyout is possible before resorting to court proceedings. However, if a partner is being denied access to information, excluded from the business, or suspects serious wrongdoing, prompt legal action may be required.
Understanding your rights under the Partnership Act 1961 is the first step in resolving a partnership dispute or navigating the dissolution process effectively.