UiTM Puncak Perdana

Faculty of Accountancy
AC 110 4C LAW 346 Dissolution of Partnership

Prepared to: Pn. Nadia Omar

Prepared by: Ahmad Afiq bin Ahmad Noh (2009491336) Mohammad Redzwan bin Khairudin (2009893676) Mohd Faqih bin Shamshudin (2009204842)

Table of Contents Contents Introduction Dissolution by Expiration Dissolution by Notice Dissolution by Death, Bankruptcy or Charge Dissolution by Illegality Dissolution by Order of the Court Consequences of dissolution Conclusion References Page 3 3 4 5 6 7 11 13 14

INTRODUCTION Dissolution of partnership means the end of a partnership, hence stopping the firm or company progress. Dissolution of partnership is different from the dissolution of firm. When any of the partners dies, retires or become insolvent but if the remaining partners still agree to continue the business of the partnership firm, then it is dissolution of partnership not the dissolution of firm. Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of firm, all the relations and the business of the firm comes to an end. A certain activities may be continued in order to let the business wound up. There are a few ways to dissolve a partnership under the Partnership Act.

1. DISSOLUTION BY EXPIRATION

This type of dissolution is determined before a certain period preceeding the dissolution.

According to S.34(a):

Subject to any agreement between partners, a partnership is dissolved if entered into a fixed term by the expiration of the term.

This section clearly explains that if there is a contract or agreement between the partners, stating the establishment of the partnership to be limited for a period, the partnership will be dissolved once the period agreed in upon ends.

However, if they agree to continue the partnership even after the agreed period, the partnership is considered as a partnership at will.

According to S.34(b):

Subject to any agreement between partners, a parnership is dissolved if entered into for a single adventure or undertaking, by the termination of the adventure or undertaking.

This sub-section indicates that, when partners establish partnership for a certain occasion, or season such as selling lemangs during Hari Raya sAeason, the parnership automatically ends when the season ends.

2. DISSOLUTION BY NOTICE A partnership can continue without any specific ending term. However, the partnership may be ended simply when a partner gives notice to the others as stated in S.34(1)(c); According to S.34(1)(c)

A partnership is dissolved If entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership. As mentioned earlier, partnership that is entered without a defined period is a partnership at will. According to S.28(1), the partnership can be brought to an end by any partner at any time, with notice, and directly related to S.34(2) that states; In the last mentioned case, the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is mentioned, as from the date of the communication of the notice. This means that a partner who want to dissolve his partnership has to give notice to the other partners. The notice does not need to be in writing, as long as the other partners are well informed.

Case: Tham Kok Cheong and Ors v Low Pui Heng

A firm made up of four partners was dissolved with the sale of the firm to a limited company. Three of the partners negotiated for the sale of the firm without informing the fourth partner. He only know about the dissolution of the partnership on the date of sale of the firm on 6th April 1966. The fourth partner alleged that he had not been given notice of the dissolution of the partnership.

The court held that the conduct of the other three partners in selling the firm to the limited company must be considered as showing their intention to dissolve the partnership. As the fourth partner only knew of the sale on the 6th, the intention to dissolve is considered as having been conveyed and takes effect from the date.

However, S.28(2) states, that if a partnership of an undetermined period was established by writing, the dissolution must also be in writing.

3. DISSOLUTION BY DEATH, BANKRUPTCY OR CHARGE ON PARTNERS SHARE. Death, Bankruptcy or Charge (Section 35 Partnership Act 1961). Every partnership will be dissolved as regards to the death or bankruptcy of any partner. When it comes to charge, a Partnership may, at the option of the other partners, be dissolved if any partner suffers his share of the Partnership property to be charged under this Act for his separate debt.

According to S. 35 (1): Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by death or bankruptcy of any other. This section provides that either death or bankruptcy can automatically dissolved a partnership. However, the partners can agree for the partnership to continue in spite of the death and bankruptcy. In other words, the firm may still go on with the surviving partner or the personal representatives of the deceased partner. S. 35 (2) then provides: A partnership, may at the option of the other partners, be dissolved if any partners suffers his shares of the partnership property to be charge under this Act for his separate debt. Here a partner is given the choice whether to continue with the partnership or not when one of the other partners charges his shares of the partnership property as security for his own personal debt. When a partner creates a charge on the partnership property, he is giving a third party an interest in the partnership property. This amount to an act which is contrary to the partnership agreement which is entered into on a personal basis. 4. DISSOLUTION BY SUPERVINING ILLEGALITY. Dissolution by illegality of partnership. (Section 36 Partnership Act 1961). A partnership may be dissolved if there is an event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. S. 36 states that: A partnership is in every case dissolved by the happening of any event which made it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. Supervening illegality is when there is sudden changes in circumstances, or status in that would make it unlawful for the business of the firm to be carried on or for the members of the firm to carry on in partnership. As an example, if a partnership is involved in importing goods from a
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country, then suddenly that country declares war on our country, if the partnership continued, then the partnership can be charged with crime of treason for trading with an enemy alien. This can be seen from the case of R v Kupfer [1915]2 K.B 321; The defendant was a partner in a firm with his two brothers. The partnership business was carried out in Frankfurt and London. The Frankfurt branch placed an order with a Dutch company in Holland, and payment was to be made by the defendant from the London office. War broke out on 4th August 1914. The defendant paid the Dutch company the amount due, and he was charged with the offence of trading with the enemy contrary to the Trading with the enemy Act 1914. One of the issues which arose was whether the partnership had been dissolved by the outbreak of the war. It was held by the court, that the partnership was dissolved as soon as war was declared. 5. DISSOLUTION BY ORDER OF THE COURT S. 37 provide that: On application by a partner, the court may decree a dissolution of the partnership in any of the following cases: (a) when a partner is found lunatic or is shown, to the satisfaction of the court, to be of permanently unsound mind, in either of which cases the application may be made as well on behalf of that partner by his committee, or next friend, or person having title to intervene as by any other partner; (b) when a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract; (c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business; (d) when a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him; (e) when the business of the partnership can only be carried on at a loss; and

(f) whenever in any case circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved.

In other words, the court has the power to order dissolution of the partnership under S. 37. A partner may apply to dissolve a partnership in cases of: (a) mental disorder; (b) permanent incapacity; (c) conduct prejudicial to the business; (d) persistent breaches of the partnership agreement; (e) the partnership being carried on at loss; and (f) the dissolution being just and equitable.

a. Mental Disorder Under S. 37 (a), a partner may apply to have a partnership dissolved based on the mental incapacity of the other partner. In fact under S. 19 of the Mental Act 1952, a partner or anyone who has the right to, can make application to have partnership dissolved. A judge would consider all the medical evidence before him exercising his powers. A person is considered to suffer from mental disorder where he suffers from mental illness, arrested or incomplete disorder of the mind, psychopathic disorder or any other disorder or disability of the mind. Due to his mental disorder the person is considered incapable of managing his property and affairs. While the proceedings are going on in court for the dissolution of the partnership, the court can grant an interlocutory injunction or temporary order to prevent who is actually incapable from interfering with the management of the partnership business. b. Permanent Incapacity Under S. 37 (b), when a partner permanently incapable of performing his part of the partnership contract the court may order dissolution of the partnership. This provision covers a wider area than mental disorder. This court would all the existing circumstances when considering an application by a partner or all of the partners, before deciding whether a partner is permanently incapacitated.

c. Conduct Prejudicial to the Partnership Business According to S. 37 (c) the court may order dissolution: when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business Prejudicial conduct is conduct which is directly or indirectly related to the partnership business. If the conduct is simply bad behavior, but is not directly or indirectly related to the partnership business, then the court may not consider the application to dissolve the partnership. In the case of Snow v Milfrod (1868) 16 World Report 654, the court considered that the adulterous affair of a partner was now prejudicial to his banking business. The conduct which is prejudicial would be what which is related to the financial position or would affect the bank credibility. In the case of Essel v Hawyard (1860) 30 Beav. 158; A solicitor who was entrusted with the clients money had used the money for his own personal needs. The court held that such behavior amounts to prejudicial behavior as it affects the credibility of the firm. As honesty is an important element in a business relationship, dishonesty, generally can be considered as prejudicial conduct. In case of Carmichael v Evans (1904) 1 Ch. 486: Carmichael and Evans were partners. Carmichael was convicted of travelling on a train without a ticket and with intent to defraud. Evans applied to have the partnership dissolved based on this. The court held that as the conviction for the dishonesty, it was considered to be detrimental to the partnership business.

d. Persistent Breahes S. 37 (d) states that dissolution can be ordered by the court: when a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him

A partnership is based on the faith and confidence among the partners. So when a partner persistently breaches the partnership agreement, it affects the partnership so much so that it cannot it destroys the mutual confidence that is necessary to carry on a partnership business. In the case of Cheeseman v Price (1865) 35 Beav. 142. A partner persistently made mistakes in book-keeping. He also had not entered the receipts in the accounts of the company. The court held that such behavior can allow partnership to be dissolved. A partnership may not be dissolved just because of differences between partners. Behavior that can be considered as breaches, making it impossible for a partnership to carry on, depends on the ethics of the profession involved. In the case of J. M. M. Lewis & ors W. E. Balasingam (supra). One of the grounds of the dissolution was that the defendant, a partner of the legal firm, had been consistently absent from the office. This, it was a said, made it impossible for the partnership to continue with him. The court referred to the Advocates and Solicitors Ordinance 1947 and came to the conclusion that the defendands behavior was not excessive. e. Carrying on business at a loss The court may allow a petition to dissolved a partnership under S. 37 (e) if the business of the partnership can be only carried on at a loss. The definition of the partnership stresses upon the fact that a partnership exist for the purpose of making profit. Thus where it is impossible for a partnership business to make a profit, and continuing the business would cause further losses, a business would cause further losses then any of the partners can apply to the court to have the partnership dissolved. The words can only be carried on at a loss must mean there must be practically impossible to make profit. In the case of Handyside v Campbell (1901) 17 TLR 623. The plaintiff applied to the court to have the partnership dissolved on the ground that the business would continue making losses only. The other partner agreed that the firm had been suffering losses. They pointed out that it was partly due poor management by the plaintiff, and also due to the fact that the plaintiff had been absent for the long time due to illness. They were of the opinion that if the proper attention was given, it would possible for the business to recover and make profits. The court held as such it would not allow the firm to be dissolved. In the case of Jennings and Baddeley (1856) 3K&J 78, 68 ER 1029. The court allowed the partnership to be dissolved as all the capital partners were obliged to contribute had been
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exhausted. The dissolution was ordered despite the possibility of profit being made in the future if more capital was injected into the mining business.

f. Just and Equitable Under S. 37 (f) the courts have very wide discretion to dissolve partnership as the ground is not specified as in the earlier provisions. Any partner may apply, but there is possibility of the court turning the application of a partner who may be in the wrong. Where both parties is fault, the court may allow the application on just and equitable grounds. The grounds applicable here are non-exhaustive. It can be any situation such as where the partnership has reached deadlock, or the complete breakdown of communications between partners. Mere differences between the partners would not be grounds to have partnership dissolved. The partner would have to show to the court that is no longer possible for the partners to have confidence in each other, which they have the right to expect from each other. This was seen in the case of Re Yenidje Tobacco Co. Ltd. (1916) 2 Ch. 426. Although the companys business was thriving, the relationship of the members had come to standstill. They only communicated through the secretary of the company. The court ordered dissolution of the company on just and equitable grounds. The principle in the company law case is applicable partnership because the same principle of what is just and equitable applies to partnership. Lord Cozens Hardy in this case had said circumstances which would justify the winding up of a partnership between these two action are circumstances which would induce the court to exercise jurisdiction under the just and equitable clause to wind up the company.

CONSEQUENCES OF DISSOLUTION Even after firm has been dissolved there are certain consequences follow. Right of partner to notify dissolution According to S. 39: On the dissolution of a partnership or retirement of a partner, any partner may publicly notify the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence.
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Notice may be given by an advertisement in a local press, gazette or by a circular letter. However, for old customers and clients of the partnership, an adverstisement in gazette alone is not sufficient notice: Re Hodgson, Bechkett v. Ramsdale and Ham Hoy Trading v. Hup Aik Tin Mining cases. Express notice such as a circular letter must be served on old customers and clients of the firm It means that a partner is entitled to notify the public to inform them that the partnership has been dissolved. Continuing authority of partners for purposes of winding up According to S. 40: After the dissolution of a partnership, the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue, notwithstanding the dissolution, 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 the dissolution, but not otherwise: Provided that the firm is in no case bound by the acts of a partner who has become bankrupt; but this provision does not affect the liability of any person who has, after the bankruptcy, represented himself or knowingly suffered himself to be represented as a partner of the bankrupt. In other words, the authority of a partner still continue to a limited extent to enable them to wind up firm business.

Rights of partners as to application of partnership property S. 41 states that: On the dissolution of a partnership, every partner is entitled, as against the other partners in the firm and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively, after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may, on the termination of the partnership, apply to the court to wind up the business and affairs of the firm. The partners are allowed to apply the partnership property for the payment of the firm debts and liabilities.
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Apportionment of premium where partnership prematurely dissolved According to S. 42: Where one partner has paid a premium to another on entering into a partnership for a fixed term, and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued; unless: (a) the dissolution is, in the judgment of the court, wholly or chiefly due to the misconduct of the partner who paid the premium; or (b) the partnership has been dissolved by an agreement containing no provision for a return of any part of the premium. Where one partner has paid premium to enter into the partnership that has been prematurely dissolved, he would entitled to the repayment of the premium in whole or part if he is not fault.

CONCLUSION Dissolution could happen under some circumstances and order of court. There are certain circumstances that would cause the partnership dissolve automatically. Partner also could apply to court using various grounds that provided by statue or discretion of court that is not specified as in the statutory. Furthermore, partners need to follow certain consequences even after dissolution before wind up business.

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REFERENCES

Lee Mei Pheng. (2004). General Principles of Malaysian Law. Shah Alam: Percetakan Printpack Sdn. Bhd. Law of Malaysia. (2006). Partnership Act 1961. Kuala Lumpur: Percetakan Nasional Malaysia Berhad. M. Geoffrey. (2001). Partnership Law. Blackstone Press Limited. Zaharah Elias. (2004). Partnership and Company Law. Institute Perkembangan Pendidikan.

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