Setting up a partnership problem question – commercial law

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Mr. Azwan and Mr. Zuhri are undecided whether to set up a company or a partnership. Before provide any suggestion, Mr. Azwan and Mr. Zuhri have to understand what is the difference between this two types of business. Partnership is a type of unincorporated association, which is an organisation without any legal personality distinct from its members.[1] This kind of business organisation is one of the favourable ways for many professionals, such as doctors, solicitors and accountants, to start their business by contributing their skills and knowledge, capital, and other resources together. Partnership was governed by the law in Malaysia, Partnership Act,1961. Refer from thePartnership Act 1980, partnership has been defined as the relation which subsists between persons carrying on a business in common with a view of profit.[2] Formation of a partnership To form a partnership, there must existing a free consent for all parties, consideration, legal purpose to form a partnership, and must be competencies partners. Under the Section 21 of the Partnership Act 1961, stated that “the mutual rights and duties of partners whether ascertained by agreement or defined by this Act may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing”. Partnership is a contractual relationship, which is formalised by written agreement. Partners need to create a contract with each others, and everything stated in the agreement or contract must be cleared and agreed by all of the partners. Once partners have signed the contract, every terms stated in the contract were agreed by partners and need to fulfill and be responsible on it, such as carry on a business together to make and gain profit. Besides that, terms in the contract can be classified in implied and express terms. Implied terms can be varied by the partnership deed, such as management and indemnity, where express terms can be varied by consent from partners. Non-Separated Legal Identity. Partnership is a not a separate legal identity, and they are existing two or above partners in the firm, who also have the power or authorities to manage the business. Means that they need to obtain the consent from partners before make any changes and decisions which will affected or related to the firm. In partnership, there are two types of partners existed, who can be as an active partner or a sleeping partner. Active partners are those who responsible on the business operation, where sleeping partners are not allowed to take part in the management of the the business and cannot ask for any extra money to pay those debts they owed. Liability Under the Limited Liabilities Partnership Act 2012, partners are the agent who represented their firm and stated that if partners unable to repay those debt, will be borne out of the property of the limited partnership. Limited partnership must be registered with the Registrar of Companies, and all of the partners must signed a statement which information are related to the firm name, general nature of the business, principal place of the firm, full name of each partners, date commencement and lifetime, description of every limited partner, and sum contributed by every limited partners. the firm name must be ended with the words ‘limited partnership’. Every partners are liable for the business debt and it is unlimited. Generally, partnership’s obligation or debts are liable for every partners. As partnership firm are those partners agreed to run the business, liable to the liability owed for the business, jointly and severally for tortuous acts and wrongs. The total amount for each partners to pay can be depends on the ratio of how much capital they had been contributed to the firm. Dissolution and winding up The dissolution of a partnership is the process during which the affairs of the partnership are wound up, which means the partnership has already comes to an end. If there are changes occurs in membership, the firm need to be dissolved at the time, even business activities are still carrying on by other partners. Where the firm is dissolved and not carrying on the business activities as before, the firm will be winding up. There are fews reasons for a firm to dissolved.
  • Partnership firm can be dissolved by partners, who determined to leave. Partners choose to leave might because of the performance of business, conflict existed between partners, or else. One of the partners choose to leave, the partnership will be terminated. There are a provision is made to regulate this situation. the death or bankruptcy of a partner will also causes the agreement be terminated.
  • Partnership firm can be dissolved by court order. In section 37 of Partnership Act 1961, there are existing this rules, for the purpose to terminate the partnership agreement. The firms are unable to generate profits or the performance of the partner who are incapable fulfilling the part of his responsible in the contract, partner’s behaviour or conducts already breach the partnership agreement, and also if the court considers that it just and equitable, court will order the firm to dissolved. Therefore, the reasons for Court to dissolve a partnership must be based on those reasons.
  • Timing also become one of the reasons to dissolve the partnership firm, lapse of time. When businessman started their business, will be believed to have an indefinitely life time to run their business. But in the agreement, need to stated down the specified lifetime.
Company A company is a legal entity which have a legal personality, separate and distinct from its members and shareholders. Companies Act 1965 is the principal of the legislation to govern the formation and operation of the company. Every company running business in Malaysia need to register to the Registrar of Companies Malaysia, and become a registered company. registered company. Existing Act is to protect the right and interests of shareholders, and also provides facilities for the incorporation of companies, management and winding up. A company must have at least 2 members to manage the business. There are two types of company, which is private limited company and public limited company.
  • Private limited company can only have 50 members and not included employee and subsidiaries. They cannot sell their shares to general publics and it is unquoted. the name at the end of the company is with the words of ‘Sendirian Berhad’.
  • Public limited company is unlimited on their members. This company will used to selling their shares to raise capital and manage by board of directors who are elected by shareholders. The name of this company is ended with ‘Berhad’.
Formation To form a company, refer to the Companies Act 1965, Section 14, any two or more persons associated for any lawful purpose may by subscribing their names to a memorandum and complying with the requirements as to registration form an incorporated company. the persons who wants to run a business in form of company, need to obtain the approval for the company name. Not all the name are acceptable or some name was already existed, to avoid meet the same name of two companies. When prepare to register and open up a business, registration fees are needed to be paid to government. There also have some certain documents to lodge with the Registrar of companies, such as The Memorandum and Articles of Association, Statutory declarations by promoters or directors, Particulars of directors and registered office, Declaration of compliance, and lastly, the statement of the allotment of shares to the subscribers to the Memorandum. Separate Legal Entity Company is being as a legal person in its own right. The company has a legal identity of it own, which distinct from its members. The law is separated the law from shareholders, directors, or employees in the company. If there is a wrong is done to a company, company has the responsible to obligate, not shareholders. Liability The liabilities borrowed by the company or be in debt to other parties to run the business is known as the company’s debt. The liabilities owed by a company are its own, their members are not liable to pay for the company. For those company who had already registered are having a limited liability, the company do not owned the complete immunity. The limited sum of liability owing was the amount which had already agreed before. If the company are runs out of money, and unable to satisfy their customers, are not allowed to exceed the limitation. Some companies used shares to limit their liability and also by guarantee. People buy shares of the company normally because of the company have the potential to generate profit and confidence on the higher return. Generally, full price of payment are needed to pay at once. If the investors are allowed to pay half first, another half are liable to the company. Suddenly if the company went into liquidation before they pay the amount of outstanding to the company, they also need to pay at that time to the company. If the shares has already transferred to another person, the person are take over to pay the outstanding amount. Winding up of company Company is Registered under the Registrar of companies and have a legal personality of their own. If the company are going to wind up or in a liquidation, it may be brought into one of two legal process. The ways to winding up can be either because of the court order, voluntary liquidation, and distribution of the company’s assets. Liquidation by court order. A company winding up by court also known as compulsory winding up. Petitioners can be creditors, liquidators, the Registrar of companies or the Official Receiver which has stated under section 217(1) of Companies Act 1965. Those parties would became petitioners most probably because of the company unable to pay theirs debt. The Court does the order of winding up which appointed by petitioners. If the court considered that there is just and equitable to wind up a company, the court also will gave an order to the company. This could be based on the objects clause of the company are different with the purpose on foundation of the company. If the purpose are failed to be achieved, the substratum of the company also failed. Beside that, the management of a small company are fall into a deadlock decision which unable to make any decisions, and also lack of confidence to manage the business. The problems must be based on the business matters, rather than a personal matters, and must amount to more than merely being outvoted. Voluntary liquidation. there are two types of voluntary liquidations, which are members’ voluntary liquidations and creditors’ voluntary liquidations.
  • Members’ voluntary liquidation is decided by the shareholders of the company, which appointed by member to liquidator, whether they want to end up the company or continue to run the business. If they decided to end up the business, they can sell off those assets they owned and gain the money. Normally this will be decided in the general meeting.
  • Creditors voluntary liquidation occurs when the company are into liquidation because of insolvent, from the directors’ request. This is who those creditors appoint to the liquidator. It was happened when there are the liabilities more than assets in the company, or the company unable to pay off all the debts.Company must have a meeting with their creditors with 14 days to give an explaination of it.
Distribution of the company’s assets. Company need to distribute their assets, which owned by the company, whether the winding up are compulsory or voluntary. Creditors, who the company owed money from them, have the right to sell the assets which he has charge. The assets can be as a mortgage to the creditors. Ultra Vires Doctrine In the simply terms, Ultra Vires means ‘beyond the power’ or ‘lack of power’ in respect of an act carried out by a person or body.[3] The company has beyond the authority of a corporation to perform, which also meaning that what the company had done was already over their object clause. Those directors have done beyond the restriction. Even though all of the directors in the company are wish to ratify it, but it is not allowed and voided. This doctrine is lack of the legal capacity to incur the responsibility. Ultra Vires has been used in different senses in company law. First, ultra vires is used to describe the acts which the action done by the company is beyond its capacity. Second, the agent of the company has carried out an actions which is excess or abuse of their powers, the directors of the company. Third, it is within the capacity and power of the company, but are in violation or in excess of the articles. [4] The development of the Ultra Vires Doctrine is the protects those investors and creditors.It is not to be established yet until the cases of Ashbury Railway Carriage and Iron Company Limited v Hector Riche, (1875). The fact of the case is the company contracted to build a railway line in Belgium, and entered into a contract with Mr Riche to employ him to construct a railway. After Riche had begun work and incurred expenses, the company repudiated the contract. He was left without any remedy becauses the contract was made outside the company’s objects clause, which were ‘to make and sell, or lend on hire railway carriages and wagons, and all kinds of railway plaint, fittings, machinery and rolling stock to carry on the business of mechanical engineers and general contractors to purchase and sell as merchants timber, coal, metal or other materials; and to buy and sell any materials on commissions or as agents.’ The contract was ratified by all the members of the company, but later on it was repudiated by the company. Riche sued the company for breach of contract. The court held that an ultra vires act or contract is void in it inception and it is void because the company had not the capacity to make it and since the company lacks the capacity to make such contract, how it can have capacity to ratify it. If the shareholders are permitted to ratify an ultra vires act or contract, it will be nothing but permitting them to do the very thing which, by the Act of Parliament, they are prohibited from doing. The contract was beyond the objects as defined in the objects clause of its memorandum and therefore it was void. The company had no capacity to ratify the contract. The effect of ultra vires transaction Ultra vires can be classified in contract, borrowings, and In terms of borrowings, which is related to the beyond power of the company in borrowings. The courts have developed certain principles is to protect such lenders.
[1]LFB Pg 470 [2]PG 410 [3]136 [4]136
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