Issues In Professional (General) Partnerships

Observations for purposes of Marketing of Life Insurance & Family Takaful

1.     Partnerships must be registered with their respective professional bodies with whom the individual partners obtain their annual practicing certificates or licenses, example, lawyers with the Bar Council and doctors with the Malaysian Medical Council. Partnerships are not required to register with the Companies Commission of Malaysia (CCM or SSM).

 

2.     Partnerships are regulated by the Partnership Act 1961 (revised1974) which provides for the general rules that apply to partnerships. However, a partnership may have an agreement among the partners on specific matters relating to their practice and business operations. In practice however, most partnerships do not enter into such agreements. This is mainly because of the “trust factor” among the partners when they start their practice.

 

3.     Although, some partnerships may have an agreement amongst themselves, they usually do not provide for the arrangements if death occurs to any one partner, as well as the benefits that would be payable to the deceased’s estate, and incidental matters relating to these issues.

 

This matter usually becomes a serious dispute between the surviving partners and the deceased partner’s family. Such disputes are not often heard by the public nor are they disputed in the courts. This is simply because there is no agreement among the partners that addresses this issue and there is no formula as how to provide for compensation to the deceased’s estate.

 

In most cases, especially, in long standing and established practices, the surviving partners would want to continue their practice and business. In almost all cases, the deceased’s estate will eventually accept whatever the surviving partners pay them as compensation, as they would hardly have any bargaining power.

 

4.     Sections 35 (1) of the Partnership Acts states as follows: Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.

 

In the simplest terms, this means, that if partners do not have any agreement that provides for the continuation of the partnership, it must be closed (dissolved) and wound up.

 

However, as often seen amongst partnerships, although there is no agreement as such, the death of a partner does not lead to the partnership being dissolved. Why is this so? This is because the “agreement” has been entered into by the surviving partners and the deceased partner’s family (or estate).

As stated above, the essence of this “agreement” is that the estate has agreed to receive a certain sum of moneys as compensation and agrees to surrender any interest in the partnership thereafter.

 

How do we resolve these issues?

i)               The answer lies in ensuring that there is an agreement amongst the partners during their lifetime.

 

ii)             The main objective of such an agreement is to buy out the interest of a partner should he suffer death or total permanent disability (popularly known as Buy- Sell Agreements).

 

iii)           The agreement should provide for a definite sum or a formula to provide for compensation upon death or total permanent disability of a partner.

 

iv)            The mechanism of creating these funds is by life insurance or family takaful contracts on each partner’s life.

 

 

v)             There are several other incidental matters that will have to be addressed and provided in these arrangements. These include the paying of premiums or contributions, and any tax implications.

 

vi)            The agreement will have to be prepared by a lawyer who has sufficient knowledge and experience in these arrangements.

 

 

Notes:

·       Individual partners may have their own insurance policies or takaful contracts but that is not the relevant for purposes of “compensation” when surviving partners take over the partnership.

 

·       General partnerships must be distinguished from Limited Liability Partnerships (LLPs) which were introduced in Malaysia in 2012.