Thursday, 29 November 2012

THE COMPARISON OF THE REGULATION AND GOVERNANCE BETWEEN LIMITED LIABILITY ACT 2012 AND PARTNERSHIP ACT 1961



In Malaysia, business activities are mostly conducted by sole traders, partnerships, companies, and trading trusts. Each of the business entities are subject to specific legal rules governing its organization. The law of partnership in Malaysia is mainly provided for by the Partnership Act 1961. The present law was originally enacted in 1961 as Sabah Ordinance No.1 of 1961 and it was revised and published in 1974 as Laws of Malaysia Act 135. The revised version came into force in Sabah with retrospective effect from 29 April 1961 and in other States on 1 July 1974. Where a particular question may not be answered by reference to the Act, because the Act is silent on that matter, English Law will be applied by virtue of Section 3 and 5 of Civil Law Act 1956. 

         This has been stated in Section 47 (1) of the Act which provides that ‘the rules of equity and of common law applicable in partnership shall continue in force, except so far as they are inconsistent with the express provisions’ of the Act. However, many of the rules on partnerships and companies are found in statues. Recently, there is another statute that has been enacted which known as Limited Liability Partnership Act 2012 (LLP). This Act is a hybrid between company and conventional partnership which gives the benefits of limited liability and at the same time allows its members the flexibility of organizing internal structure as in a traditional partnership. LLP is a separate legal entity which has the unlimited capacity to hold property while the partners enjoy the limited liability status.


COMPARE AND CONTRAST ON REGULATIONS


  1.1       Registration
As we already know that partners can choose whether they want to regulate their partnership under Limited Liability Partnership Act 2012 (LLP 2012) or under Partnership Act 1961 (PA 1961). If the partners choose to regulate their partnership under LLP 2012, they must know that there is a provision in the Act itself that states about the registration of the partnership. This can be proved in Section 10 of LLP 2012, which states that, “A person may apply for registration of a limited liability partnership to the Registrar and the application shall be accompanied by the prescribed fee and such documents as may be specified by the Registrar.” In contrast, PA 1961 does not have any provision on the registration of the partnership. However, this does not mean that the partnership need not be registered. It still must be registered, not under PA 1961 but under Section 5 of Registration of Business Act 1956, which states that whoever wants to run the business must apply the registration to the Registrar.
          On the other hand, as a comparison between these two Acts (LLP 2012 and PA 1961), we can see that both Acts require the partnership to be registered to the Registrar of the Companies Commission of Malaysia. This has been stated in Section 10 of LLP 2012 and Section 5 of the Registration of Business Act 1956 itself. Furthermore, the particulars that are needed for the application of the registration of the partnership in these Acts are more less similar. Once the requirements of registration are complete, the Registrar will then shall register the partnership according to Section 11 of LLP 2012 and Section 5 (3) of Registration of Business Act 1956 respectively.

1.2        Liability
In Limited Liability Partnership Act 2012 (LLP 2012), Section 3 proclaimed that the liability of the partners is limited to their agreed contribution. No partner is liable on account of the independent or unauthorized acts of other partners, thus allowing individual partners to be shield from joint liability created by another partner’s wrongful acts or misconduct. This means that this Act apply a limited liability towards the partners in any partnership. On the other hand, in Partnership Act 1961 (PA 1961), Section 11 proclaimed that every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is a partner. Thus, this shows that the Act apply the unlimited liability towards the partners under it.

1.3     Number of Partners
The comparison between Limited Liability Partnership Act 2012 (LLP 2012) and Partnership Act 1961 (PA 1961) on the element of number of the partners is where the partnership can still be formed as long as there is a minimum number of two persons in the partnership. This has been stated in Section 6 of LLP 2012.
       In contrast, there is a difference in a maximum number of the partners between limited liability partnership and conventional partnership, where we can found this in Section 6 of LLP 2012 and Section 14 (3) of Companies Act 1965 respectively. For limited liability partnership, there is no maximum number of partners provided. However, in conventional partnership, it must consist of not more than twenty partners.  In addition, there is an exceptional for the minimum number of partners in LLP 2012, where this means that the partnership can still be formed even though there is only one person carry on business, subject to some conditions stated in Section 7 of LLP 2012.

1.4      Rules as to interest and duties of partners
If there is a special agreement between the partners on their interest and duties, both Limited Liability Partnership Act 2012 (LLP 2012) and Partnership Act 1961 (PA 1961) are silent on that particular rules. This is because the internal affairs of the partnership will be regulating according to the agreed agreement between the partners. However, if there is no special agreement that made between the partners regarding their interest and duties, the Acts have provided provision regarding that matters. Under LLP 2012, default provisions for limited liability partnership are provided in the Second Schedule [Section 9], whereas under PA 1961, it is provided in Section 26 of PA 1961.  Some of the provisions are; first, all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losers whether of capital or otherwise sustained by the firm. Second, no person may be introduced as a partner without the consent of all existing partners. Next, every partner may take part in the management of the partnership business, and so forth. 

1.5        Dissolution
Limited liability partnership may be dissolved by the way of Court order or voluntary winding-up only when it cease to operate, all debts and liabilities have been discharged, application is preceded by way of notice to all partners and published in national newspaper of the intention to winding-up and no objection from Inland Revenue Board (IRB), creditor, and partner. Limited liability partnership may be struck off on the grounds of; no longer carrying on business, contravention of the Act, prejudicial to national interest, no liquidator acting for court order winding-up or affairs have been fully wound-up but with insufficient assets to pay the cost to obtain court order. On the other hand, in conventional partnership, upon its dissolution, there must be a settlement of partnership accounts. Subject to any agreement between the partners, a partnership is dissolved if entered into for a fixed term, by the expiration of that term, if entered into for a single adventure or undertaking by termination of that adventure or if entered into for undefined time by any partner giving notice to the other or others of his intention to dissolve the partnership. Where no fixed term has been agreed upon, any partner may determined the partnership at anytime on giving notice of his intention to do so to all the other partners. Where the partnership has originally been constituted by written document,  a notice in writing, signed by the respective partner is deem sufficient.

1.6         Maintenance of accounts, books, and audit requirement
In limited liability partnership, maintenance of accounts, books, and audit requirement must keep accounting and other records (not less than 7 years from the end of the financial year) to sufficiently explain its financial position. Accounts shall be prepared to give a true and fair view of the state of the affairs of the limited liability partnership. Subject to limited liability partnership agreement, the accounts are not required to be audited. The annual declaration by at least 2 partners on the solvency of the limited liability partnership within 90 days from the end of the financial year of the limited liability partnership. In contrast, in the conventional partnership, there is no mandatory statutory audit requirement. However, for tax purposes, the Director General may exercise his power to compel the production of audited accounts within a specific time. Furthermore, partners are bound to render through accounts and full information of all things affecting the partnership to any partner or his legal representative.


COMPARE AND CONTRAST ON GOVERNANCE

·         Administrator
The administrator of Limited Liability Partnership Act 2012 (LLP 2012) is the Registrar who is appointed by the Chief Executive Officer of the Commission. In contrast, the Partnership Act 1961 (PA 1961) does not has any Registrar who administered the Act.

·         Appointment of officer or secretary
Limited liability partnership must appoint at least one compliance officer, which means either one of the partners (not an undercharged bankrupt) or persons qualified to act as a secretary under Companies Act 1965 who must be a citizen or permanent resident of Malaysia and ordinarily resides in Malaysia. The statutory duties of a compliance officer are to register any changes in registered particulars of the limited liability partnership, keep and maintain registers and records of the limited liability partnership, and ensuring publication of names of limited liability partnership. Failure to observe the statutory duties conferred will render the compliance officer personally liable for the contravention of the statutory duties unless the court is satisfied that he is not so liable. On the other hand, in conventional partnership, there is no such requirement is imposed.


IMPLICATION OF THE COMPARISON AND CONTRAST

The introduction of Limited Liability Partnership is consistent with the Government’s aspiration to improve public and Government’s service delivery system, simplify procedures and reduce administrative and compliance burden relating to foster a friendly business environment in Malaysia. 

There are few implication on imposing the Limited Liability Act 2012 after contrasting it with the Partnership Act 1961. Limited liability status will be conferred to Limited Liability Partnership, which position markedly from conventional partnership law which imposes joint and several liabilities on conventional partnership for all tortiuous acts of their co-partners acting within the scope of their actual or apparent authority. Besides that, in limited liability partnership, partners should be accorded limited liability in respect of tort and contractual claims, which means, individual partners will not be liable from the contracts, debts, obligations and liabilities of the limited liability partnership as well as personal liability from the conducts, wrongful acts, omissions, negligence or other tortuous conduct of an employee, staff or co-partner, which were carried out during the course of business, and the personal assets of partners will not be at risk for such acts or matters. In the event that the limited liability partnership becomes insolvent, a partner’s liability should be limited to the amount of his capital contribution to the limited liability partnership subsisting at the time.

            Furthermore, Limited Liability Partnership Act 2012 provide that each partner of limited liability partnership (LLP) is deemed to be its agents but not agent to each other and can thus act for, represent and bind the LLP provided that they have authority to perform such acts which are made in the course of business. Any limitation on authority of a partner provided in LLP agreement will not prejudice any third party. The LLP will not be bound by acts of its partners in dealing with a third party if the partner does not have necessary authority to act on behalf of LLP, the third party dealing with partner is aware of this or the third party does not know or believe that partner is a partner of LLP. 

            LLP also has the benefit over conventional partnership in registration procedures. Unlike the requirement contained under section 5 (2) of the Registration of Business Act 1956 where particulars of partnership agreement shall be stated in the prescribed form, such requirement is not necessary to maintain privacy of arrangement between and amongst the partners, and to minimize administrative and compliance costs on the LLP. As conclusive evidence that the registration requirements have been complied with, a certificate of registration will be issued where an unique registration number will be allocated to the LLP. In addition, to inform the public that such entity is an LLP, and not a conventional partnership registered under Registration of Business Act 1956, an LLP must use the words ‘LL Partnership’ or the abbreviation ‘LLP’ as part of its name and that such name must be publicized at its place of business and official documents together with the unique LLP number.

            In addition, the membership of an LLP is a minimum of two without any upper limit as the changing business environment may necessitate business to expand and grow. The flexibility to allow a sole partner to continue to operate without having to wind up the business will make the LLP more convenient and attractive as it increases business flexibility and avoid cost of winding-up when the number of partners falls into two. However, single-partner in LLP is not that suitable for that business to be called “partnership” because it will be contradiction with the definition of “partnership” itself under section 3(1) of the Partnership Act 1961 which defined it as ‘the relation which subsists between persons carrying on business with a common view of profit’ and not in line with international norms.


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