Business Law: Formation of a Partnership

Case Summary

Healthy Sdn Bhd is a company which sells pharmaceutical products in Johore. In July 2013, Healthy Sdn Bhd received an offer from Good Care Sdn Bhd to become its partner in selling pharmaceutical products which Good Care Sdn Bhd manufactured. Mr.Ramu, who is the General Manager of Healthy Sdn Bhd seeks your advice on the formation of a partnership in particular between two companies.

Advice for Mr. Ramu

The partnership between different parties operates with several obligations that the parties into partnership must adhere to. In the given facts, the formation of the partnership is between two companies. Section 3(1) of the Partnership Act, 1961 defines partnership to include any relationship that subsists comprising of two parties or more partners with the aim of making profits. The section expressly excludes societies, clubs, mutual benefit organizations, and building societies. The relationship between the parties in the partnership must be defined from the onset (Ibpus.com & International Business Publications, USA, 2007). This means that there must be a minimum of two members, and their obligations and rights in the relationship should be defined. The duties, terms, and responsibilities of the partnership should be spelled out. The business of the partnership should be defined (Sulaiman et al., 2008). Upon such an agreement, the partnership becomes binding on each member, and it is enforceable in law. Section 2 of the Partnership Act, 1961 defines business to include occupation, trade, and a profession. This means that a law firm is a partnership in the context of Section 2. The business defined under Section 2 should be geared towards profit-making. This means that those people in the partnership who are not involved in the sharing of the profits are not partners. This aspect clearly points out that any partnership that is for voluntary and welfare work is not a partnership. It also means that employees of the partnership are distinct from the partnership since they do not share profits (Morse, 2010). Section 3(2) diversifies the relationship that is capable of forming a partnership. The section excludes several entities from forming partnerships. Firstly, any relationship between shareholders of a company or any association duly registered under the Companies Act, 1965 is limited from forming a partnership. There is a similar limitation to the cooperative societies formed under any written law in respect to cooperative societies. The disqualification of companies from partnerships extends to cover instances where a company or any association is registered pursuant to any law and has effect in Malaysia. This entails the Royal Charter or any Act of Parliament in the United Kingdom (Ibpus.com & International Business Publications, USA, 2012).

In this case, Mr. Ramu cannot initiate a valid partnership between the two companies since Section 3 (2) of the Partnership Act 1961 expressly prohibits the formation of a partnership between a company and another company. Such association is null in the eyes of the law, and every form of transaction that they may purport to undertake is illegal. This means that they cannot engage in any business as joint parties since the law does not allow it. Any form of name generated from an unlawful joint partnership is void before the law. This means that any party trading with the partnership will be doing so with a nonexistent entity in the eyes of the law. My advice to Mr. Ramu is that a valid partnership between Healthy Sdn Bhd and Good Care Sdn Bhd cannot be formed going with the above explanations. Section 3(2) of the Partnership Act 1961 excludes companies from forming partnerships. The rationale of such a prohibition is based on the fact that companies enjoy limited liability protection. Further, a company is distinct from the shareholders. This means that unlike in a partnership where it is easier to apportion liability, it is a tricky venture in company law. This means that the two entities in the partnership may enjoy immunity from any suit, which is contradictory to the liability of partners under the Partnership Act 1961. In addition, according to the case of Davis v. Davis (1894) 70 LT 265, the Court held that a partnership between two the parties did not make them joint partners by the mere fact that they owned a house that was given to them by their father. It is, therefore, unlawful for two companies to form a partnership, and the joint union will not be recognized in the law (Ibpus.com & International Business Publications, USA, 2008).

References

Ibpus.com & International Business Publications, USA. (2007). Malaysia Business and Investment Opportunities Yearbook. Washington, D.C.: International Business Publications.

Ibpus.com & International Business Publications, USA. (2008). Malaysia company laws and regulations handbook. Washington, D.C.: International Business Publications.

Ibpus.com & International Business Publications, USA. (2012). Malaysia business law handbook: strategic information and laws. Washington, D.C.: International Business Publications.

Sulaiman, A. N. M., Bidi, A., Hanrahan, P., Ramsay, I., & Stapledon, G. (2008). Commercial applications of company law in Malaysia. Chang Charn Rd, Singapore: CCH Asia Pte. Ltd.

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