BUSINESS ENTITIES SOLE PROPRIETORSHIP

1
BUSINESS ENTITIES SOLE PROPRIETORSHIP
PARTNERSHIP

• BT20403 COMMERCIAL LAW
• TOPIC 2_1

2
OUTLINE

• Business Entities
• Sole Proprietorship
• Partnership
• Definition
• Main Characteristics
• Relations of partners to one another
• Liabilities of partners
• Partnership property
• Dissolution of partnership

3
BUSINESS ENTITIES

• SOLE PROPRIETORSHIP (MILIKAN TUNGGAL)
• PARTNERSHIP (PERKONGSIAN)
• COMPANIES (SYARIKAT)

4
SOLE PROPRIETORSHIP

• Registration of Business Act 1956
• Characteristics
• Be your boss
• Keep all the profit to yourself
• Suffer your loss
• No separation between personal asset and business
  asset (UNLIMITED LIABILITY)
• Less hassle- no returns etc

5
PARTNERSHIP

• Partnership still exist though it is not
  registered under the Partnership Act 1961.
• Gulazam v. Noorzaman and Sobath 1957
• Plaintiff was to look after the cattle and Def
  was to provide capital
• Plaintiff claimed money due to him but defence
  brought by Def p/ship never existed thus
  plaintiff had no recourse for the outstanding
  amount.
• Held
• Partnership does exist, though it was not
  registered
• Plaintiff claimed allowed.

6
Definition of Partnership

• S.3(1) of the Partnership Act 1967
• Partnership is the relation which subsists
  between persons carrying on business in common
  view of profit.

7
cont

• From the definition in s.3, we can derive 3
  salient features of partnership
• involves a relationship between 2 or more people.
  S.14(3)(b) Companies Act 1965 restricts
  membership to not more than 20 members
• relationship involved is for business purposes,
  Soh Hood Beng v. Khoo Chye Neo (1897) 4 SSLR 115
• profit driven, Aw Yong Wai Choo v. Arief Trading
  Sdn Bhd (1992) 1 MLJ 166

8
Self quiz

• Vince, Felix, Mawi and Marsha are good friends.
  They have finally agreed that each of them will
  contribute RM1,000 per month so that each of
  them can start their business.
• Avril and Lavigne have agreed in writing that
  both of them will set up a shop that sells
  donated goods and the income will be channelled
  towards victims of tsunami in Aceh, Thailand,
  Malaysia and Sri Lanka and earthquake in Pakistan
  and India.
• Consider whether partnership exists in these
  situations?

9
Main characteristics

• Formation
• known as firm
• a partnership has no legal personality apart from
  the personalities of its members
• in forming a partnership, elements of a contract
  have to be fulfilled e.g. agreement, capacity,
  intention, consideration, certainty etc. Refer
  William Jacks Co (Malaya) Ltd. v. Chan Yong
  Trading Co. (1964) MLJ 105- minor is liable upon
  the age of majority unless he withdraws from the
  partnership.
• 
  cont

10
...cont

• Persons of legal capacity are capable of entering
  into a partnership agreement
• Even a minor are capable of entering into a
  partnership agreement
• Goode v. Harrison, it was held that a minor could
  be in a partnership for any duration of time
  until he wanted to disaffirm it
• However, a minor cannot incur or be responsible
  for any contractual liability for the firms
  debts
• Upon reaching the age of 18, the minor can, if he
  wishes, discharge himself from all future debts
  by terminating the p/ship agreement
• Failure to repudiate the agreement makes him
  liable for the p/ship debts.

11
cont

• Registration
• In Peninsular Malaysia, a partnership business
  must be registered under the Registration of
  Business Act 1956, in Sarawak under the Sarawak
  Cap. 64 (business names) and Cap.33 (Business,
  Professions and Trade Licensing) and in Sabah,
  under the Trade Licensing Ordinance No 16 1948.
• However, the mere failure to register the
  partnership under the statutes would not mean
  that the partners cannot enforce their rights
  against each other if on the facts, a partnership
  exists Gulazam v Noorzaman and Sobath 1957
• Required to inform changes.

12
cont

• Contents of the partnership agreement
• relationship between partners may be created
  orally, in writing or by conduct
• In the absence of any oral or written agreement,
  hence the terms prescribed in the Partnership Act
  will be applicable
• Name of the firm, place of business, list of
  partners and their contribution, duration (if
  any), asset (if any), p/ship account, profit and
  loss distribution, methods of dissolution.

13
cont

• Management In absence of contrary agreement, all
  partners are entitled to share in managing the
  firm (s.26(e))
• Contractual authority A partner is presumed in
  law to have authority to enter into contracts on
  behalf of the firm in the ordinary course of its
  business.
• S.7 - a partner is an agent of the firm and other
  partners
• Express authority
• Apparent authority
• Numbers not more than 20 members

14
cont

• Liability A partner is liable for the debts of
  the partnership to the full extent of his private
  estate
• Dissolution
• by the expiration of the agreed period of its
  duration
• upon the completion of the particular undertaking
  for which the firm was formed
• death or bankruptcy of any partner
• mutual agreement
• by order of a court

15
Relations of (a) partners to 1 another,
(b) firm partners
(c) partners 3rd parties

• The partners are governed by their partnership
  agreement
• In the absence of such agreement, the Partnership
  Act 1961 will be applicable- s.26
• the principle of utmost good faith between
  partners is envisaged in these provisions
• S.30 duty of partners to render accounts etc
• S.31 accountability for private profits
• S.32 - duty of a partner not to compete with him

16
cont

• S.7- a partner is an agent of the firm and other
  partners
• Every partner is an agent of the firm and his
  other partners for the purpose of the business of
  the partnership, and the acts of every partner
  who does any act for carrying on in the usual way
  of business of the kind carried on by the firm of
  which he is a member bind the firm and his
  partners, unless the partners so acting has in
  fact no authority to act for the firm in the
  particular matter, and the person with whom he is
  dealing either knows that he has no authority or
  does not know or believe him to be a partner.

17
cont

• The authority of each partner may either be an
  actual authority or apparent authority.
• Actual authority (express or implied).
• Express authority may be given in writing (as in
  the partnership agreement) or orally
• - Chan King Yue v. Lee Wong (1962) ()
• Osman bin Haji Mohamed Usop v. Chan Kang Swee
  (1924)
• Sithambaram Chetty v. Hong Hing (1924)
• William Jacks Co (Malaya) Ltd. v. Chan Yong
  Trading Co. (1964) ()

18
cont

• Chan King Yue v. Lee Wong 1962 MJ 379
• Plaintiffs husband borrowed from her RM35,000 as
  a loan from her to the firm in which he is a
  partner. He gave her a receipt in the name of the
  partnership. The money was paid into the
  partnership account and immediately utilized by
  the firm to pay off some debts. Plaintiff sued
  for the recovery of the loan.
• Held the borrowing was an act necessary for the
  carrying on of the business of the partnership
  and as such bound the co-partner.

19
cont

• William Jacks Co (Malaya) Ltd. v. Chan Yong
  Trading Co. (1964)
• The plaintiff claimed against the defendants the
  sum, of Rm12,734.91 for goods sold and delivered
  by the plaintiff to the defendants. Chan and Yong
  were sued as partners of the firm. Yong (a minor)
  did not take any steps to defend but Chan raised
  the following defences
• that no firm by the name of Chan Yong Trading
  Co. ever existed, and that , if such a firm did
  exist, he was not a partner thereof
• That he did not in any way represented or held
  himself out as a partner of the said firm
• The goods bought from the plaintiff were for the
  personal use of Yong and that the partners were
  therefore not liable.
  ...cont.

20
CONT.

• The court held
• Chan was a partner of Chan Yong Trading
• Chan represented himself to be partner in the
  firm by approaching a salesman of the plaintiff
  to ask for credit facilities with the plaintiff
  company by registering the partnership with the
  ROB, and by opening a banking account with his
  own money in the name of the partnership.
• The fact that Yong made use of the goods bought
  from the plaintiff for his own purpose did not
  mean that the partnership and partners were not
  liable.

21
...cont

• Apparent authority (or a.k.a ostensible
  authority)
• When a partner (who does not have the authority)
  holds out that he has such authority, or a person
  holds out that he is a partner and the other
  partners knew about it yet do nothing to stop it,
  hence the partners are liable.
• Garland v. Jacomb
• Kendal v. Wood

22
...cont

• Partners are bound by acts on behalf of firm
• S.8 An act or instrument relating to the
  business of the firm and done or executed in the
  firms name, or in any other manner showing an
  intention to bind the firm, by any person thereto
  authorized, whether a partner or not, is binding
  on the firm and all other partners
• Provided that ......

23
...cont

• If the third party has notice of the agreement
  between the partners (restricting the power of
  any one or more of them of them to bind the firm)
  then the firm will not be bound in respect of any
  act done in contravention of the agreement.
• S.10 If it has been agreed between the partners
  that any restriction shall be placed on the power
  of any one or more of them to bind the form, no
  act done in contravention of the agreement is
  binding on the firm with respect to persons
  having notice of the agreement.

24
...cont

• S.9 Where one partner pledges the credit of the
  firm for a purpose apparently not connected with
  firms ordinary courses of business, the firm is
  not bound, unless he is in fact specially
  authorised by other partners but this section
  does not affect any personal liability incurred
  by an individual partner.
• Cases
• Bank of Australasia v. Breillat
• Mercantile Credit Co v. Garrod

25
Liability Of Partners

• The concept of Joint and Severally Liable
• Partners liabilities
• Contractual liability
• Tortious liability
• Misapplication of money and/or property
• Criminal liability.
• The above liabilities will be discussed in turn

26
Contractual liability

• S.11 every partner in a firm is liable jointly
  with the other partners for all debts and
  obligations of the firm incurred while he is a
  partner, and after his death his estate is also
  severally liable in due course of administration
  for such debts and obligations so far as they
  remain unsatisfied but subject to the prior
  payment of his separate debts.
• 
  cont

27
...cont

• S.11 deals with partners contractual liability
  to third parties
• While he is a partner, every partner is liable
  jointly with the other partners for all debts and
  obligations of the firm and
• After his death, his estate is also severally
  liable.

28
Liability between firm and partnersJOINT AND
SEVERAL LIABILITIES, S.11
Plaintiff can opt either to
May sue one or more of the partners concerned
Sue all the partners jointly
Every partner is liable jointly and severally for
every conduct of the firm while he is a member of
the firm.
29
cont

• Jointly and severally liable
• Tanggungan bersama dan berasingan
• Pihak yang menuntut (plaintif) mempunyai dua
  pilihan
• 1. Ia boleh menuntut kesemua rakan kongsi
  (jointly) atau
• 2. Ia boleh memilih untuk membuat tuntutan
  terhadap mana-mana rakan kongsi (severally)

30
cont

• For example if Mr X, Mr Y and Mr Z are partners
  in the firm named XYZ Enterprise the legal
  entity may be described as Mr X, Mr Y and Mr Z
  trading as XYZ Enterprise
• Kendall v. Hamilton (1897) ()

31
cont

• Kendall v. Hamilton (1897)
• A creditor sued all the obvious members of a
  partnership and was awarded judgement against
  them. He failed to recover the debt in full. He
  subsequently discovered a wealthy dormant partner
  whom he sought to sue for the balance of the
  debt.
• HOL held that since the debt was a joint one
  only, by suing the apparent partners the creditor
  elected to sue only them and could not commence
  fresh proceedings against the other partner.

32
Tortious liability

• Refers to the breach of of a duty imposed by the
  law. The law of torts seeks to compensate the
  victims of certain forms of harmful conduct by an
  award or an injunction which prevents the same
  from reoccurring.
• - eg. A negligently collides with Bs
  stationary car on the road and causes damage to
  it.
• 
  
• 
  cont

33
...cont

• eg trespass
• There must be - a duty of care
• - breach of the duty of
  care
• - damage occurs
• S.12
• Where, by any wrongful act or omission of any
  partner acting in the ordinary course of the
  business of the firm or with the authority of his
  co-partners, loss or injury is caused to any
  person not being a partner in the firm, or any
  penalty is incurred, the firm is liable to the
  same extent as the partner so acting or omitting
  to act.

34
Misapplication of money or property-s.13

• In the following cases, namely
• Where one partner, acting within the scope of his
  apparent authority receives the money or property
  of a third person and misapplies it and
• Where a firm in the course of its business
  receives the money or property of a third person,
  and the money or property so received is
  misapplied by one or more of the partners while
  it is the custody of the firm,
• the firm is liable to make good the loss.
  

35
Criminal liability

• Partners are only jointly liable in civil cases,
  they are not jointly liable in criminal cases
• The above rule is clearly envisaged in the case
  of Chung Shin Kian Anor v. Public Prosecutor
  1980 2 MLJ 246

36
Liability of Persons for Holding Out

• S.16 either by -words spoken or written or
• -conduct or
• - who knowingly suffers
  himself,
• liable as a partner to anyone who has on the
  faith of any such representation
• proviso where after a partners death, the
  partnership business is continued in the old
  firm-name, the continued use of that name or of
  the deceased partners name as part thereof shall
  not of itself make his executors or
  administrators estate or effects liable for any
  partnerships debt contracted after his death.
• William Jacks Co (Malaya) Ltd. v. Chan Yong
  Trading Co.

37
Liability of Outgoing Partners (retiring)

• still liable unless he has given notice that he
  is no longer a partner
• S.38(1) - where a person deals with a firm after
  a change in its 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.

38
cont

• S.19(2) A partner who retires from a firm does
  not thereby cease to be liable for partnership
  debts or obligations incurred before his
  retirement.
• S.19(3) A retiring partner may be discharged
  from any existing liabilities by an agreement to
  the effect between himself and the members of the
  firms as newly constituted and the creditors,
  and this agreement may be either express or
  inferred as a fact from the course of dealing
  between the creditors and the firms as newly
  constituted.

39
cont

• Re Siew Inn Steamship Co 1934 MLJ 180
• Malayan Banking Bhd v. Lim Chee Leng Anor
  (1985) 1 MLJ 214
• Respondents were liable for the debts incurred
  before they retire or resign.

40
Liability of incoming partners (new)

• General rule a new partner is not liable for the
  debts incurred prior to his admission, refer
  s.19(1)
• A person who is admitted as a partner into an
  existing firm does not thereby become liable to
  the creditors of the firm for anything done
  before he became partner.

41
cont

• Wong Peng Yuen v. Senanayake
• The defendant and Goh were partners of a stock
  and sharebrokers firm. They executed a
  partnership deed whereby Goh transferred RM14000
  worth of shares to his minor children. Plaintiff
  paid the defendant RM20000 in consideration of
  being made a partner. Firm lost about RM91000 on
  speculation of shares and later was dissolved.
  Plaintiff wanted to avoid sharing the losses and
  claimed for the return of the RM20000 on the
  ground that he was a new partner of the firm,
  inter alia because the two infant children had
  never consented to his admission as a partner.
• Held The consent of the two children was not
  necessary because the deed was merely an
  assignment of share in the partnership by Goh to
  his infant children and this did not confer on
  them the rights of a partner in the said firm.

42
Partnership Property

• S.22(1)
• All property and rights and interests in
  property originally brought into the partnership
  stock or acquired, whether by purchase or
  otherwise on account of the firm or for the
  purposes and in the course of the partnership
  business, and must be held and applied by the
  partners exclusively for the purposes of the
  partnership and in accordance with the
  partnership agreement.

43
cont

• Any property which is purchased out of
  partnership asset is regarded as partnership
  property though it is not used for carrying out
  the partnership business - s.23
• s.24 in the absence of an agreement to the
  contrary, the property of the partnership has to
  be sold on dissolution of partnership.

44
Fiduciary duties of partners

• S.30 partners to render true accounts
• S.31 every partner must account to the firm for
  any benefit derived by him, without the consent
  of the other partners
• S.32 if a partner, without the consent of the
  other partners, carries on business of the same
  nature as and competing with that of the firm, he
  must account for and pay over to the firm all
  profits made by him in that business.

45
Dissolution

• Several ways in which a partnership is dissolved
  
• By agreement (s.34)
• a. upon the expiry of specific duration (if any)
• b. Mutually agreed by the partners
• By death or bankruptcy (s.35)
• -s.35(1) death or bankruptcy of any partner
• -s.35(2) by charging his shares, dissolution at
  the option of other partners
• By supervening illegality (s.36)
• cont

46
cont

• By Court order (s.37) a partner may apply-
• unsound mind
• permanent incapability of performing his
  contractual obligations
• the partner will affect prejudicially the
  carrying on of the business
• where a partner, wilfully or persistently commits
  a breach of partnership or otherwise so conducts
  himself in matters relating to partnership
  business- not reasonably practicable for others
  to carry on the business with him
• just and equitable in the courts opinion.

47
Consequences of dissolution

• Right to notify outsiders, s.38
• Right of a partner to give public notice of
  retirement or dissolution, s.39
• Refer cases
• Re Chop Yew Seong
• Tan Siin Moh v. Lebel Ltd 1988 2 MLJ 51
• Jemco Sdn Bhd v. Andrew Liau Ka Lieng Ors
  1985 2 MLJ 119