Many businesses in Malaysia are established as partnerships. Sometimes people just prefer partnerships, which is cheaper to operate, compared to a private limited company. But there’s one problem: A partner’s death, could mean the dissolution of the partnership.
It sounds strange, but it’s true: The death of a partner, could mean the unravelling of the partnership. So says section 35(1) of the Partnership Act: “Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.”
So why should it be unfair for a partnership to continue when a partner has passed away?
Issues caused by the death of a partner
A partner dying, could be valid cause for concern. (We will discuss them below) The law recognises these concerns and puts the dissolution of the partnership as the default position. But it is not the only possible outcome. A partnership can be continued, if there was an agreement between the partners, that the partnership will not be dissolved by the death of a partner.
But first, let’s see some of the reasons why continuing a partnership after a partner’s death, is bad:
1. The deceased partner’s beneficiaries may be uninterested in the business, unsuited to work in the business, or just lack the skills to take over the partner’s role. If they insisted on continuing the business, it may be harmful for the business.
2. Partnerships are small businesses, by definition, and in practice. So, a partner in a partnership may have unique skills, that cannot be replicated by his heirs and/or family members. It does not make sense to force the other partners to tolerate incompetency, which could affect the business.
3. Partners in a partnership usually have a good working relationship. But they may not have the same relationship with their partners’ children.
4. Partners to a partnership may have contributed a sizeable amount of money, which, is tied up with the business. It would be difficult to recover the money without the dissolution of the partnership.
So what is the solution to prevent dissolution? An agreement.
The wording of section 35(1) of the Partnership Act says that it is “subject to agreement”. This means that if the partners have an agreement, that allows the partnership to continue, then it can and will continue, to exist.
Here is a possible wording for a “succession” clause, that you can include into your partnership agreement:
“Succession. The Partnership shall not terminate upon the withdrawal, death, or dissolution of a Partner. The successor in interest to the withdrawn, deceased, or dissolved Partner shall be admitted as a new Partner only upon unanimous consent of the remaining Partners. The value of the former Partner’s interest shall be determined and distributed to his or her successor in interest.”
Consider a Buy-Sell Agreement
A buy-sell agreement is a special type of agreement which is backed by insurance. If a partner dies, the insurance company pays out to his heirs, and his share is distributed to the other partners.
Ask your favourite insurance agent about buy-sell agreements. 🙂 Here is the possible wording for a “Buy-Sell Agreement” clause, to insert into your partnership agreement:
“Buy-Sell Agreement. Upon triggering events such as retirement, bankruptcy, death, disability, or dissociation of a Partner, the remaining Partner shall have the option to purchase the departing Partner’s interests at fair market value determined by [valuation process/method].”
In actual practice, the value of a business can fluctuate, and insurance may be insufficient to compensate the family members. There may be a need to top up over the years.
There are also other steps which need to be carried out, like passing a director’s board resolution to approve the scheme in the buy-sell agreement.
Still, it is worth considering. The buy-sell agreement helps ensure a smooth transition of ownership and control when certain triggering events occur.
Thank you for reading.
This article was prepared for information purposes only, and should not be considered as legal advice. Please consult with a qualified lawyer before making any decision on the contents of this article.