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Partnership Law: Extent of Liabilities of an Incoming Partner

May 8, 2008 9 comments

Incoming Partner: A person who is admitted as a partner into an existing firm or partnership.

 

The general rule for the extent of a partner’s liability in the context of Partnership Law is provided in Halsbury’s Laws of England, Third Edition that 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.

 

In Malaysia the governing law that addresses partnership matters is provided in the Partnership Act 1961 (Act 135). With regards to the extent of liabilities to be borne by an incoming partner it is best to refer to the judgment made by Suriyadi J (as he then was) in Leong Sing (sue as a firm) v. Perusahaan Kuari (Melaka Pindah) Sdn Bhd (formerly known as Malacca Lian Hwa Sdn Bhd [1997] 5 MLJ 657. In this case the court referred to sections 11 and section 19(1) of the Partnership Act 1961.

 

The provisions are as follows:-

11. Liability of partners.

“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 a 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.”

 

19. Liability of incoming and outgoing partners.

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 a partner.

2.       A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement.

3.       A retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm 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 firm as newly constituted.

 

From the above provisions it can be argued that, in particular section 19(1), the present partners cannot be held liable for the alleged wrongdoing of the previous partners; and because the present partners cannot be held liable, therefore, the firm also cannot be liable because the liability of the partnership and the liability of the partners are the same. A witty argument this is.

 

As per the case above the court ruled that the liability of the firm or partnership is distinct and different from the liability of the firm’s partners. It is true that a partnership, being not a human being but merely an artificial legal entity, on its own can do nothing. Thus on its own it can do no wrong. The partnership acts through its human agency, its partners. Every act or omissions of the partners directly pertaining to the partnership is in law deemed to be an act or an omission of the partnership.

 

In relation to partnerships, the law recognizes two types of liability:-

1.       the liability of the partners; and

2.       the liability of the partnership.

 

Sections 11 and 19 seem to cover liabilities that are contractual in nature and from the discussion above we can safely say that an incoming partner will not bear any contractual liability incurred before his admission as partner.

 

In the event that the firm or partnership committed a wrong, sections 11 and 19 are irrelevant due to fact that they are only concerned with the liability of partners and they are also confined within the spheres of debts and obligations i.e. contractual liabilities. In this regard the relevant law to be applied to the situation is section 12 of the Partnership Act, as it discusses about the liability of the firm or partnership itself.

 

Section 12 states that:-

12. Liability of firm for wrongs.

“Where by any wrongly 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 therefore to the same extent as the partner so acting or omitting to act.”

 

The above provision seems to cover tortious liabilities or wrongs exclusively. It is different from its counterparts i.e. sections 11 and 19 which covers contractual issues.

 

It is, however, true that before any liability can be attributed to a partnership, a wrongful act or wrongful omission (that relates directly to the partnership) must first be committed by a partner. Yet at the same time it is also pertinent to note that there is nothing in section 12 or, indeed, anywhere else in the Partnership Act that states that the liability of the firm incurred by reason of a wrongdoing of a partner ceases once the errant partner ceases to be a partner of the firm.

 

Therefore it can be said that by virtue of section 12 above, when a wrong that is tortious in nature is committed by the firm or partners the liability that arise from  that tort will bind the firm exclusively. Take note that a partnership has no such veil of incorporation that allows it to be treated as a separate legal entity from its owners (partners). Thus when a firm is exclusively held liable for a tort, damages will be paid to the victim out of the firm’s pocket which is the same pockets of its partners. When this occurs what about the position of an incoming partner? Will he be bound to share portion of that liability? Maybe section 14 of the Act may help clarify this matter.

 

Section 14 states that:-

14. Liability for wrongs joint and several

“Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under section 12 or 13.”

 

The provision above consolidates the fact in the event that the firm committed a tortious wrong an incoming partner will not be liable for the wrongs committed by the firm before he be admitted as a partner.

 

In section 14 the provision state that “…while he is a partner therein becomes liable…” In my view this phrase has the potential to be contested. For example, on Monday the firm commits a wrong, then on Wednesday Abu joins the firm and later on Friday the court held that that firm is liable for the wrong done on Monday. The issue now is when that liability arises? On the date of judgment or on the day the wrong is done? If liability of the firm arise on the date of judgment then of course Abu, an incoming partner will also be jointly and severally liable with the other partners even though he is ‘innocent’.

 

All in all, in accordance to the general rule and the provisions mentioned above, it seems to be settled law that an incoming partner will not be liable for any obligation or debt incurred by the firm or its existing partners that are incurred before he joins or be admitted as partner of the firm or partnership. However with regards to tortious liability or wrong the situation is somewhat debatable.

 

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