Introduction
Company law in Malaysia is governed by the Companies Act 1965 and the Companies Regulations 1966. The body responsible for overseeing the administration of the Act is the Registrar of Companies (RoC).
However, the Companies Act does not set out all the areas of company law and it is provided that the Act must be read together with case law and other relevant laws in interpreting how the Act is to be applied.
Companies (Memo and articles)
For a company to exist, it must be registered with the Registrar of Companies. The steps which must be followed are:
Ø Reservation of name
Ø Submission of documents required by law
Ø Payment of a fee
Ø Receipt of the certificate of incorporation (for private companies) or certificate of incorporation and certificate of commencement of trade (for public companies).
Once a company exists, it may be looked at by considering the different classes which it can fall under.
1. Liability
The definition section in company law is found in section 4(1) Companies Act 1965.
Company
Limited liability Unlimited Liability
Ltd by shares Ltd by guarantee Ltd by shares and guarantee
(a) Company limited by shares
A company limited by shares is formed on the principle of having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them.
The liability of the shareholder extends to the unpaid portion of the nominal value of the shares.
Once the shares are fully paid, the shareholder is relieved of liability to contribute on a winding up.
Creditors of a company limited by shares have only a limited right to recover from the shareholders in the event of a company’s winding up. The creditors are intended to be warned of this by the requirement that a limited company shall have the word Berhad (Limited) or Sendirian Berhad (Private Limited) as part of and at the end of its name. The abbreviation of Bhd (Ltd) or Sdn Bhd (Pte Ltd) is used.
(b) Company limited by guarantee
A company limited by guarantee is one formed on the principle of having the liability of the members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of a company in the event of a insolvent winding up.
A member of a company limited by guarantee is not required to pay any capital while the company is a going concern.
The guarantee is set out in the memorandum of association and usually reads as follows:
“Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year afterwards for payment of debts and liabilities of the company contracted before he ceases to be a member…such amount as may be required not exceeding (…)”.
Trading companies usually do not adopt the guarantee form. This form of company is usually used by those involved in charitable organizations or research establishments.
Bursa Malaysia Bhd (formerly KLSE Holdings Bhd) was set up as a company limited by guarantee – it provides a forum for the sale and purchase of shares.
(c) Company limited both by shares and guarantee
A company limited by both shares and guarantee is one in which the member has liability as shareholder to the extent of the unpaid portion of the nominal value of his shares and as guarantor to the amount nominated in the memorandum as undertaken to be paid on a winding up.
It is possible in a company limited by both shares and guarantee to have some members who hold shares and others who do not. All members are however, liable to honour the guarantee.
(d) Unlimited companies
An unlimited company is one formed on the principle that there is no limit placed on the liability of the members. Companies of this type are virtually partnerships with unlimited obligation placed on the members to pay towards the assets of the company. The idea of unlimited liability is used in relation to the mutual fund type of corporation because it provides an easier means of redeeming existing shares.
2. Public and private companies
(a) Private companies
A private company must meet the requirements set out under section 15(1) of the Companies Act. Otherwise, it is automatically a public company. There are two types of private companies:
Ø non-exempt private companies
Ø exempt private companies
Requirements which must be met by private companies are as set out in section 15(1):
Ø restrictions on the right of shareholders to transfer their shares;
Ø limits members to not more than 50 persons (counting joint holders of shares as one person);
Ø prohibits invitations to the public to subscribe for any of its shares or debentures; and
Ø prohibits any invitation to the public to deposit money with it and any offer to the public to accept deposits of money with it for fixed terms or payable at call, whether interest bearing or not.
The above restrictions are to be contained in the memorandum or articles of association.
(Example of restrictions on the right to transfer shares are where directors are required to approve the transaction or where a member who wishes to sell his shares must first offer them to the existing members of the company.)
A private co must obtain a certificate of incorporation before it can commence business.
A private co will be an exempt private co if it fulfills the following:
Ø it must not have more than 20 members;
Ø none of its shares or the interests in the shares must be held by a corporation.
The benefit that an exempt private company has is that it may keep its financial information private. While the co is required to prepare its balance sheet and its profit and loss account, it does not have to file an audited balance sheet and profit and loss account.
Ø Further, some CA provisions do not apply to exempt private companies, eg s 133 which does not allow companies to loan money directly or indirectly to its directors, does not apply to an exempt private co.
(b) Public companies
A public company is defined as any company other than a private company.
Unlike a private company which can commence business once it gets it certificate of incorporation, a public company must still wait until the Registrar issues them the certificate of commencement of trade before they can start doing business.
Advantages:
Ø no limit on number of members;
Ø shares may be advertised;
Ø easy to obtain loans from financial institutions.
Disadvantages:
Ø very strict rules to follow under company laws and regulations
Ø loans to directors not allowed except under strict conditions
Ø publicity requirements eg accounts, prospectus etc
3. Subsidiary and holding companies
Section 5: A company is deemed to be a subsidiary of another company if:
Ø the other company controls the composition of the board of directors of the subsidiary;
Ø the other company holds more than half of the voting power of the subsidiary company; and
Ø the other company holds more than half of the issued share capital; or
Ø the subsidiary is a subsidiary of any company which the other company’s subsidiary.
A holding company is a company to which another company is a subsidiary. However, a subsidiary cannot be a shareholder of its holding company. This is because the holding company already holds shares in the subsidiary.
If the subsidiary were allowed to hold shares in the holding co, the holding co could tell the subsidiary co how to vote at the holding co meetings. This would give too much power to the directors of the holding co.
Any allotment or transfer of shares in the holding company to the subsidiary is void unless the subsidiary is holding as personal representative or bare trustee.
The directors of a holding company must attach to every balance sheet a report with respect to the state of affairs of the holding company and all its subsidiaries.
Bursa Malaysia BhdExample:
Malaysia Securities Exchange Bhd
Labuan International Financial Exchange Inc
Malaysian Derivatives Exchange Bhd
Others – clearing houses and depositories for securities
4. Foreign companies
This is a company or other body incorporated (registered) outside Malaysia.
Every foreign company must register with the Registrar of Companies before it establishes a place of business or carries on business in Malaysia.
A contract entered into by a foreign company which has registered itself in accordance with the Companies Act is valid.
Makro: Dutch
Carrefour: French
Tesco: British
Giant: Hong Kong
The failure of a foreign company to register is a breach of condition but does not render the contract a nullity. (Effect?)
Student’s checkpoint: What are the different types of companies based on the liability of members?
Why is it important that members’ liability is limited?
Is a limitation of liability on the part of its members to the advantage of the co or to its disadvantage?
Sole proprietor
Individual persons can trade or practice in a business or profession. Most such practices are small but this is not necessarily so. Often a sole practitioner will operate in his own name but he need not do so.
A sole proprietor is entitled to all the profits of the sole proprietorship and is liable for all its debts without limitation.
This flows from the fact that in law, a sole proprietorship is not a separate legal entity from the trader himself.
Clubs and societies
Clubs and societies do not exist for the purpose of acquiring profit, unlike companies. In addition, they are not separate legal entities from their members.
Partnerships
The Partnership Act 1961 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view to profit.”
Ø No of partners
Ø Formalities of setting up partnership
Ø Partnership agreements
Ø Agency between partners and firm
Ø Liability of partners
Ø Dissolution of partnership
1. Number of partners
Generally there must not be more than 20 partners. However, this upper limit of 20 does not apply to solicitors and accountants qualified to act as auditors.
These professions are prohibited from operating as companies with limited liability and in return are exempted from the ceiling of 20 members. Some large firms of solicitors have several hundred partners and large firms of accountants may have more partners and have offices throughout the world.
2. Formalities of setting up a partnership
No formalities are required to form partnerships.
There are no documents to be submitted to the Registrar of Companies (RoC) and it is not necessary for a partnership to be registered at the Registry of Companies.
There are no formalities as to the name of the firm. However, the words “Sdn Bhd” or “Bhd” must not be used at the end of the name. Additions such as “Company” or “& Co” are allowed.
For a partnership, the only publicity requirements arise if it chooses to use a “firm name”, different from the true surnames, with or without additional names or initials of all the partners. There are other permitted additions such as “& Sons”.
If there are several partners (more than three or four usually), they will usually choose a “firm name”. This may be an artificial name or it may comprise the names of one or more of the senior partners.
Within the firm itself, certain formalities are required ie the names of all partners must be shown beside the letterheads, except for firms with more than 20 partners.
However, in firms with more than 20 partners, if one partner’s name is given, all must be given.
A firm must display all partners’ names at its business premises and written disclosure must be given on request to those doing business with the firm.
3. Partnership agreements
In practice, larger firms often do have formal partnership agreements which add to, and vary the provisions of the Partnership Act but these are not necessary.
Partnership agreements are not open to public inspection, unlike the memorandum and articles of association of a registered company.
These agreements will usually set out the duties of each partner within the firm, their responsibilities, liabilities and other matters. Among these are terms for the dissolution of a partnership.
4. Partnership property
Partnership property belongs to the partners jointly.
If more than four partners own or lease partnership land, legal title to the land must be vested in not more than four trustees. These will usually be senior partners who hold the land in trust for all.
5. Agency between partners
Partners are in effect, mutual agents. Every partner has apparent authority to carry out matters on behalf of the firm. Unless otherwise agreed, every partner may take part in the management of the partnership business.
By the Partnership Act 1961 section 7, every partner is the agent of the firm and his partners for the purpose of the partnership business. The firm is bound by what he does on its behalf if the act is one for carrying on the usual way that business is carried out by the firm.
If the partners try to restrict the usual authority of one of their number, they may still be bound if what he does on their behalf appears to be normal.
An outsider cannot be expected to know what has occurred inside a partnership. The firm is therefore bound if a partner is acting within his apparent authority, even if this involves a breach of his actual instructions.
However, the firm will not be bound if the outsider either knows that the partner is exceeding his authority or does not know or believe him to be a partner. An outsider who is not deceived cannot rely on apparent authority.
Concept of apparent authority:
Ø act done is for usual way the firm carries out business
Ø third party did not know partner did not have authority to do that act
6. Liability of partners
Each partner may be sued and held liable for the full amount due under any of the firm’s contracts.
By section 11, partners are liable jointly and severally, and therefore, if one partner has to pay the full amount he can recover appropriate shares from his fellow partners (although some of these may no longer be solvent or available).
ADT Ltd v BDO Binder Hamlyn [1995]
A large firm of accountants was held liable in tort for damages of £65 million, plus substantial costs. The firm had insured itself against liability but the actual policy covered much less than this. Any partner could be held personally liable for the full amount.
7. Liability of non-partners
In partnerships, even non-partners can sometimes be personally liable for debts of the firm.
Under section 16 of the Partnership Act, the offence of holding out may be used against a non-partner.
This can occur where:
Ø a retiring partner fails adequately to publicise his retirement especially to clients who know him; or
Ø any person may be personally liable for a debt of the firm if he has by his words, spoken or written or by conduct, represented himself as being a partner or allowed himself to be so represented;
and persons who have been deceived have given credit to the firm because they believed him to be a partner.
Holding out – section 16 PA
Retiring partner does not adequately publicise retirement
Person represents himself as partner of firm; or
Allows firm to represent him as partner
As a consequence, third party believes person to be partner
Non-partner liable to third party along with the other partners and the firm
8. Special agreement
Under a special agreement, it is possible for some of the partners to have limited liability. Some of the partners (at least one) must be unlimited, and the unlimited partner effectively runs the firm.
Limited partners must not take any active part in the management although they may inspect accounts.
This type of firm must be registered by filing documents with the Registrar of Companies.
The limited partner simply contributes a stated amount of capital, has no further liability and takes little further part in the co.
The death, insanity or insolvency of a limited partner does not end the partnership.
9. Dissolution of partnership
A partnership can be dissolved very easily. There are two ways to dissolve a partnership:
Ø automatic dissolution under the Partnership Act 1961;
Ø by entering into a partnership agreement to end the firm on the occurrence of specified events.
Unless the parties agree otherwise in advance, it is dissolved by:
Ø expiration of the time
Ø completion of the specific task for which it was initially made
Ø death of a partner
Ø bankruptcy of a partner
Ø partner gives notice that he wants to leave the firm.
Dissolution of partnership
Partnership Act – automatic dissolution
Dissolution according to agreement in partnership contract
All of this can be very inconvenient, particularly as regards the partnership property, which is one reason why these provisions are often excluded or varied by a partnership agreement.
Student’s checkpoint: How do partners become liable for contracts which other partners have entered into?
Can a third party enforce a contract entered into with a partner who does not have authority to enter into contracts for the firm?
Differences between companies and partnerships
Very broadly, the differences between a partnership and a company is as follows:
- the number of partners must not exceed 20;
- the partners cannot enjoy limited liability (except under special agreement);
- a partnership, like a sole proprietorship, does not constitute a separate legal entity from its partners (regardless of its being a limited liability partnership).
(a) Limited liability of shareholders
The measure of a shareholder’s liability for the debts of the company is related to the amount that the shareholder has invested in the shares of the company.
A shareholder can only be compelled to contribute, on the winding up of the company, the amount which remains unpaid on his shareholding for the payment of the company’s debts.
If the shares held by the shareholder are fully paid up, the shareholder need not contribute further to the payment of the company’s debts.
A partner is jointly and severally liable for all the debts of the partnership. (Section?)
(b) Perpetual succession
The existence of a corporation is ordinarily unlimited in time and is not affected by the death of a shareholder. The element of perpetual succession enables the company for example, to hold property without the constant problem of transmitting it from one generation to the next.
With a partnership, the retirement or death of a partner usually brings the partnership to an end, unless the partners have agreed otherwise.
(c) Transferability of interest
A shareholder may, subject to restriction in the articles, sell or otherwise dispose of his shares at any time. This ends his membership and introduces a new member into the company. Similarly, on the death of a shareholder, his shares may pass by transmission to his legal representative and later to his beneficiary. The legal operation of the company itself will not be affected.
A partnership interest, on the other hand, will generally not be capable of assignment or transfer, unless the partners have agreed otherwise.
(d) Control by members
If the shares held by a shareholder are voting shares, he may participate in the election of directors who are responsible for the day-to-day management of the company. Accordingly, the shareholders with their collective right to elect the directors, have the ultimate control of the company without being concerned in its day-to-day management.
In a partnership, both control and management are vested in all the partners (subject to the partnership agreement) and no partner can contract out of his responsibilities in this regard so far as the public is concerned.
(e) Organisation’s liability for the acts of its members
As the company is a separate entity from its shareholders and because management of the company is given to the company’s board of directors, the power to bind the company and the authority to deal with the company’s assets do not, in the normal course of events, rest with the shareholders.
Any partner has ostensible authority to commit the partnership and the other partners.
(Section?)
(f) Capacity of organisation to enter into contracts with its members
A shareholder may himself enter into a business relationship with the company. He is not liable to account for any profit from that relationship.
This is unlike a partnership where the partnership has no separate existence from the partners. In a partnership, a partner may neither contract with nor sue the firm.
(g) Financing the business
Once the business of the company has been established, the company may obtain additional capital by the issue of any unissued shares and by the issue of debentures
Such facilities are not available to a firm.
Note however, that incorporation does not always make the raising of finances easier. This is particularly so in a small company seeking overdraft facilities or such loans from a lending institution. The lending institution is likely to require personal guarantees from the major shareholders (piercing the veil).
Company law in Malaysia is governed by the Companies Act 1965 and the Companies Regulations 1966. The body responsible for overseeing the administration of the Act is the Registrar of Companies (RoC).
However, the Companies Act does not set out all the areas of company law and it is provided that the Act must be read together with case law and other relevant laws in interpreting how the Act is to be applied.
Companies (Memo and articles)
For a company to exist, it must be registered with the Registrar of Companies. The steps which must be followed are:
Ø Reservation of name
Ø Submission of documents required by law
Ø Payment of a fee
Ø Receipt of the certificate of incorporation (for private companies) or certificate of incorporation and certificate of commencement of trade (for public companies).
Once a company exists, it may be looked at by considering the different classes which it can fall under.
1. Liability
The definition section in company law is found in section 4(1) Companies Act 1965.
Company
Limited liability Unlimited Liability
Ltd by shares Ltd by guarantee Ltd by shares and guarantee
(a) Company limited by shares
A company limited by shares is formed on the principle of having the liability of its members limited to the amount, if any, unpaid on the shares respectively held by them.
The liability of the shareholder extends to the unpaid portion of the nominal value of the shares.
Once the shares are fully paid, the shareholder is relieved of liability to contribute on a winding up.
Creditors of a company limited by shares have only a limited right to recover from the shareholders in the event of a company’s winding up. The creditors are intended to be warned of this by the requirement that a limited company shall have the word Berhad (Limited) or Sendirian Berhad (Private Limited) as part of and at the end of its name. The abbreviation of Bhd (Ltd) or Sdn Bhd (Pte Ltd) is used.
(b) Company limited by guarantee
A company limited by guarantee is one formed on the principle of having the liability of the members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of a company in the event of a insolvent winding up.
A member of a company limited by guarantee is not required to pay any capital while the company is a going concern.
The guarantee is set out in the memorandum of association and usually reads as follows:
“Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year afterwards for payment of debts and liabilities of the company contracted before he ceases to be a member…such amount as may be required not exceeding (…)”.
Trading companies usually do not adopt the guarantee form. This form of company is usually used by those involved in charitable organizations or research establishments.
Bursa Malaysia Bhd (formerly KLSE Holdings Bhd) was set up as a company limited by guarantee – it provides a forum for the sale and purchase of shares.
(c) Company limited both by shares and guarantee
A company limited by both shares and guarantee is one in which the member has liability as shareholder to the extent of the unpaid portion of the nominal value of his shares and as guarantor to the amount nominated in the memorandum as undertaken to be paid on a winding up.
It is possible in a company limited by both shares and guarantee to have some members who hold shares and others who do not. All members are however, liable to honour the guarantee.
(d) Unlimited companies
An unlimited company is one formed on the principle that there is no limit placed on the liability of the members. Companies of this type are virtually partnerships with unlimited obligation placed on the members to pay towards the assets of the company. The idea of unlimited liability is used in relation to the mutual fund type of corporation because it provides an easier means of redeeming existing shares.
2. Public and private companies
(a) Private companies
A private company must meet the requirements set out under section 15(1) of the Companies Act. Otherwise, it is automatically a public company. There are two types of private companies:
Ø non-exempt private companies
Ø exempt private companies
Requirements which must be met by private companies are as set out in section 15(1):
Ø restrictions on the right of shareholders to transfer their shares;
Ø limits members to not more than 50 persons (counting joint holders of shares as one person);
Ø prohibits invitations to the public to subscribe for any of its shares or debentures; and
Ø prohibits any invitation to the public to deposit money with it and any offer to the public to accept deposits of money with it for fixed terms or payable at call, whether interest bearing or not.
The above restrictions are to be contained in the memorandum or articles of association.
(Example of restrictions on the right to transfer shares are where directors are required to approve the transaction or where a member who wishes to sell his shares must first offer them to the existing members of the company.)
A private co must obtain a certificate of incorporation before it can commence business.
A private co will be an exempt private co if it fulfills the following:
Ø it must not have more than 20 members;
Ø none of its shares or the interests in the shares must be held by a corporation.
The benefit that an exempt private company has is that it may keep its financial information private. While the co is required to prepare its balance sheet and its profit and loss account, it does not have to file an audited balance sheet and profit and loss account.
Ø Further, some CA provisions do not apply to exempt private companies, eg s 133 which does not allow companies to loan money directly or indirectly to its directors, does not apply to an exempt private co.
(b) Public companies
A public company is defined as any company other than a private company.
Unlike a private company which can commence business once it gets it certificate of incorporation, a public company must still wait until the Registrar issues them the certificate of commencement of trade before they can start doing business.
Advantages:
Ø no limit on number of members;
Ø shares may be advertised;
Ø easy to obtain loans from financial institutions.
Disadvantages:
Ø very strict rules to follow under company laws and regulations
Ø loans to directors not allowed except under strict conditions
Ø publicity requirements eg accounts, prospectus etc
3. Subsidiary and holding companies
Section 5: A company is deemed to be a subsidiary of another company if:
Ø the other company controls the composition of the board of directors of the subsidiary;
Ø the other company holds more than half of the voting power of the subsidiary company; and
Ø the other company holds more than half of the issued share capital; or
Ø the subsidiary is a subsidiary of any company which the other company’s subsidiary.
A holding company is a company to which another company is a subsidiary. However, a subsidiary cannot be a shareholder of its holding company. This is because the holding company already holds shares in the subsidiary.
If the subsidiary were allowed to hold shares in the holding co, the holding co could tell the subsidiary co how to vote at the holding co meetings. This would give too much power to the directors of the holding co.
Any allotment or transfer of shares in the holding company to the subsidiary is void unless the subsidiary is holding as personal representative or bare trustee.
The directors of a holding company must attach to every balance sheet a report with respect to the state of affairs of the holding company and all its subsidiaries.
Bursa Malaysia BhdExample:
Malaysia Securities Exchange Bhd
Labuan International Financial Exchange Inc
Malaysian Derivatives Exchange Bhd
Others – clearing houses and depositories for securities
4. Foreign companies
This is a company or other body incorporated (registered) outside Malaysia.
Every foreign company must register with the Registrar of Companies before it establishes a place of business or carries on business in Malaysia.
A contract entered into by a foreign company which has registered itself in accordance with the Companies Act is valid.
Makro: Dutch
Carrefour: French
Tesco: British
Giant: Hong Kong
The failure of a foreign company to register is a breach of condition but does not render the contract a nullity. (Effect?)
Student’s checkpoint: What are the different types of companies based on the liability of members?
Why is it important that members’ liability is limited?
Is a limitation of liability on the part of its members to the advantage of the co or to its disadvantage?
Sole proprietor
Individual persons can trade or practice in a business or profession. Most such practices are small but this is not necessarily so. Often a sole practitioner will operate in his own name but he need not do so.
A sole proprietor is entitled to all the profits of the sole proprietorship and is liable for all its debts without limitation.
This flows from the fact that in law, a sole proprietorship is not a separate legal entity from the trader himself.
Clubs and societies
Clubs and societies do not exist for the purpose of acquiring profit, unlike companies. In addition, they are not separate legal entities from their members.
Partnerships
The Partnership Act 1961 defines a partnership as “the relation which subsists between persons carrying on a business in common with a view to profit.”
Ø No of partners
Ø Formalities of setting up partnership
Ø Partnership agreements
Ø Agency between partners and firm
Ø Liability of partners
Ø Dissolution of partnership
1. Number of partners
Generally there must not be more than 20 partners. However, this upper limit of 20 does not apply to solicitors and accountants qualified to act as auditors.
These professions are prohibited from operating as companies with limited liability and in return are exempted from the ceiling of 20 members. Some large firms of solicitors have several hundred partners and large firms of accountants may have more partners and have offices throughout the world.
2. Formalities of setting up a partnership
No formalities are required to form partnerships.
There are no documents to be submitted to the Registrar of Companies (RoC) and it is not necessary for a partnership to be registered at the Registry of Companies.
There are no formalities as to the name of the firm. However, the words “Sdn Bhd” or “Bhd” must not be used at the end of the name. Additions such as “Company” or “& Co” are allowed.
For a partnership, the only publicity requirements arise if it chooses to use a “firm name”, different from the true surnames, with or without additional names or initials of all the partners. There are other permitted additions such as “& Sons”.
If there are several partners (more than three or four usually), they will usually choose a “firm name”. This may be an artificial name or it may comprise the names of one or more of the senior partners.
Within the firm itself, certain formalities are required ie the names of all partners must be shown beside the letterheads, except for firms with more than 20 partners.
However, in firms with more than 20 partners, if one partner’s name is given, all must be given.
A firm must display all partners’ names at its business premises and written disclosure must be given on request to those doing business with the firm.
3. Partnership agreements
In practice, larger firms often do have formal partnership agreements which add to, and vary the provisions of the Partnership Act but these are not necessary.
Partnership agreements are not open to public inspection, unlike the memorandum and articles of association of a registered company.
These agreements will usually set out the duties of each partner within the firm, their responsibilities, liabilities and other matters. Among these are terms for the dissolution of a partnership.
4. Partnership property
Partnership property belongs to the partners jointly.
If more than four partners own or lease partnership land, legal title to the land must be vested in not more than four trustees. These will usually be senior partners who hold the land in trust for all.
5. Agency between partners
Partners are in effect, mutual agents. Every partner has apparent authority to carry out matters on behalf of the firm. Unless otherwise agreed, every partner may take part in the management of the partnership business.
By the Partnership Act 1961 section 7, every partner is the agent of the firm and his partners for the purpose of the partnership business. The firm is bound by what he does on its behalf if the act is one for carrying on the usual way that business is carried out by the firm.
If the partners try to restrict the usual authority of one of their number, they may still be bound if what he does on their behalf appears to be normal.
An outsider cannot be expected to know what has occurred inside a partnership. The firm is therefore bound if a partner is acting within his apparent authority, even if this involves a breach of his actual instructions.
However, the firm will not be bound if the outsider either knows that the partner is exceeding his authority or does not know or believe him to be a partner. An outsider who is not deceived cannot rely on apparent authority.
Concept of apparent authority:
Ø act done is for usual way the firm carries out business
Ø third party did not know partner did not have authority to do that act
6. Liability of partners
Each partner may be sued and held liable for the full amount due under any of the firm’s contracts.
By section 11, partners are liable jointly and severally, and therefore, if one partner has to pay the full amount he can recover appropriate shares from his fellow partners (although some of these may no longer be solvent or available).
ADT Ltd v BDO Binder Hamlyn [1995]
A large firm of accountants was held liable in tort for damages of £65 million, plus substantial costs. The firm had insured itself against liability but the actual policy covered much less than this. Any partner could be held personally liable for the full amount.
7. Liability of non-partners
In partnerships, even non-partners can sometimes be personally liable for debts of the firm.
Under section 16 of the Partnership Act, the offence of holding out may be used against a non-partner.
This can occur where:
Ø a retiring partner fails adequately to publicise his retirement especially to clients who know him; or
Ø any person may be personally liable for a debt of the firm if he has by his words, spoken or written or by conduct, represented himself as being a partner or allowed himself to be so represented;
and persons who have been deceived have given credit to the firm because they believed him to be a partner.
Holding out – section 16 PA
Retiring partner does not adequately publicise retirement
Person represents himself as partner of firm; or
Allows firm to represent him as partner
As a consequence, third party believes person to be partner
Non-partner liable to third party along with the other partners and the firm
8. Special agreement
Under a special agreement, it is possible for some of the partners to have limited liability. Some of the partners (at least one) must be unlimited, and the unlimited partner effectively runs the firm.
Limited partners must not take any active part in the management although they may inspect accounts.
This type of firm must be registered by filing documents with the Registrar of Companies.
The limited partner simply contributes a stated amount of capital, has no further liability and takes little further part in the co.
The death, insanity or insolvency of a limited partner does not end the partnership.
9. Dissolution of partnership
A partnership can be dissolved very easily. There are two ways to dissolve a partnership:
Ø automatic dissolution under the Partnership Act 1961;
Ø by entering into a partnership agreement to end the firm on the occurrence of specified events.
Unless the parties agree otherwise in advance, it is dissolved by:
Ø expiration of the time
Ø completion of the specific task for which it was initially made
Ø death of a partner
Ø bankruptcy of a partner
Ø partner gives notice that he wants to leave the firm.
Dissolution of partnership
Partnership Act – automatic dissolution
Dissolution according to agreement in partnership contract
All of this can be very inconvenient, particularly as regards the partnership property, which is one reason why these provisions are often excluded or varied by a partnership agreement.
Student’s checkpoint: How do partners become liable for contracts which other partners have entered into?
Can a third party enforce a contract entered into with a partner who does not have authority to enter into contracts for the firm?
Differences between companies and partnerships
Very broadly, the differences between a partnership and a company is as follows:
- the number of partners must not exceed 20;
- the partners cannot enjoy limited liability (except under special agreement);
- a partnership, like a sole proprietorship, does not constitute a separate legal entity from its partners (regardless of its being a limited liability partnership).
(a) Limited liability of shareholders
The measure of a shareholder’s liability for the debts of the company is related to the amount that the shareholder has invested in the shares of the company.
A shareholder can only be compelled to contribute, on the winding up of the company, the amount which remains unpaid on his shareholding for the payment of the company’s debts.
If the shares held by the shareholder are fully paid up, the shareholder need not contribute further to the payment of the company’s debts.
A partner is jointly and severally liable for all the debts of the partnership. (Section?)
(b) Perpetual succession
The existence of a corporation is ordinarily unlimited in time and is not affected by the death of a shareholder. The element of perpetual succession enables the company for example, to hold property without the constant problem of transmitting it from one generation to the next.
With a partnership, the retirement or death of a partner usually brings the partnership to an end, unless the partners have agreed otherwise.
(c) Transferability of interest
A shareholder may, subject to restriction in the articles, sell or otherwise dispose of his shares at any time. This ends his membership and introduces a new member into the company. Similarly, on the death of a shareholder, his shares may pass by transmission to his legal representative and later to his beneficiary. The legal operation of the company itself will not be affected.
A partnership interest, on the other hand, will generally not be capable of assignment or transfer, unless the partners have agreed otherwise.
(d) Control by members
If the shares held by a shareholder are voting shares, he may participate in the election of directors who are responsible for the day-to-day management of the company. Accordingly, the shareholders with their collective right to elect the directors, have the ultimate control of the company without being concerned in its day-to-day management.
In a partnership, both control and management are vested in all the partners (subject to the partnership agreement) and no partner can contract out of his responsibilities in this regard so far as the public is concerned.
(e) Organisation’s liability for the acts of its members
As the company is a separate entity from its shareholders and because management of the company is given to the company’s board of directors, the power to bind the company and the authority to deal with the company’s assets do not, in the normal course of events, rest with the shareholders.
Any partner has ostensible authority to commit the partnership and the other partners.
(Section?)
(f) Capacity of organisation to enter into contracts with its members
A shareholder may himself enter into a business relationship with the company. He is not liable to account for any profit from that relationship.
This is unlike a partnership where the partnership has no separate existence from the partners. In a partnership, a partner may neither contract with nor sue the firm.
(g) Financing the business
Once the business of the company has been established, the company may obtain additional capital by the issue of any unissued shares and by the issue of debentures
Such facilities are not available to a firm.
Note however, that incorporation does not always make the raising of finances easier. This is particularly so in a small company seeking overdraft facilities or such loans from a lending institution. The lending institution is likely to require personal guarantees from the major shareholders (piercing the veil).
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