Tutorial 7

Suggested Solution

The Hang Seng University of Hong Kong

Hong Kong Business Law (ACY 2021)

Law of Partnership

Question 1
What are the advantages and disadvantages of setting up business in the form of a
partnership as compared with a company?

Solution:
Advantages of setting up business in Partnership as compared with the company:

- Formation of partnership is more flexible while setting up company needs to

register with the Company Registrar and procedures are more complicated
- There is no requirement to file annual returns or documents and therefore easier to
maintain the higher degree of privacy
- Partnership is subject to the lower rate of income tax
- Partners would be able to participate in management of the business while
shareholders normally do not interfere with daily management

Disadvantages of setting up business in Partnership as compared with the company:

- Partners has unlimited liability towards partnership debts incurred in the course of
business, and must be personally liable for those debts by using personal assets to
satisfy those debts, while shareholders in companies have limited liability towards
company debts
- It is more difficult for the partnership to raise the capital, limited channel as
compared to the company

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Question 2
If X and Y buy an apartment together only, are they legal partners and why? Under
what conditions will they become partners?

Solution
Buying an apartment together is called ‘co-ownership of property’ and does not itself
make X and Y as partners in a business.

Partnership is defined as:

- “the relation which subsists between persons carrying on business in common
with a view to profit”

The major aspects include:

- Relationship between persons: Partners do not have individual legal personality
from the firms, not considered separate entities from the firm, leading to usual
unlimited liability of partners
- Business: means an activity for profit e.g. commercial or profession (not
charitable purposes)
- Carrying on business in common: participate in the business, partnership starts
when partners are involved in preparatory work. Partners are agents for the ‘firm’
and for each other (Dual agency relationship)
- With a view to profit: meaning partners share losses and profits from the business
together, normally net profits

Simply investing together in the apartment and realizing a return on the joint
investment does not necessarily create a partnership. There must be some other
elements in order to create a partnership. These elements are carrying on a business
in common with a view to profit, meaning sharing the profits and losses and all
partners conducting the business together. Moreover, the court looks at substance but
not form to determine the existence of partnership.

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Question 3
Explain the fiduciary duties of partners in a partnership under the common law. Give
one example for each fiduciary duty.
Solution

Relation between the partners is based upon mutual trust and confidence. Partners
must act honestly and for the benefit of the firm as a whole.

Partners owe each other fiduciary duties, these include:

Duty to act in good faith and to make full disclosure. Under section 30 of the
Partnership Ordinance (Cap.38) (“PO”), partners are bound to render true accounts
and full information of all things affecting the partnership to any partner. For example,
one partner failed to disclose all the assets of the partnership in Law v Law [1905].

Duty not to make secret profits (accountability of partners for private profits). A
partner is not allowed to make secret profits from his position as a partner. This is a
strict rule that is applicable even if the profit is made without any element of
dishonesty. Under section 31(1) of PO, every partner must account to the firm for any
benefit derived by him, without the consent of the other partners, from any transaction
concerning the partnership or from any use by him of the partnership property, name,
or business connection. In Bentley v Craven [1853], a partner who bought goods at a
discounted price and sold them to the firm at market price was required to account for
the profits he made from these dealings. The fact that the other partners could not
have obtained a discount so that they suffered no loss is irrelevant. The duty not to
make secret profits also extends to ‘business opportunities’ that arise during the
course of the partnership but are taken up by one of the partners after he leaves the
partnership (Kao Lee & Yip v Koo Hoi Yan [2003]).

Duty to avoid conflict of interest (duty not to compete with the firm). Under section
32 of PO, if a partner, without the consent of the other partners, carries on any
business of the same nature as and competing with that of the firm, he must account
for and pay over to the firm all profits made by him in that business. Whether the

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business is similar depends on how specialized the business of the firm is. For
example, X sets up another business doing the same business of car trading and in the
same city as his partnership to compete with his firm.

Question 4
There are three partners in a firm “L, N and S & Co.”. The partnership owes XYZ
bank a huge sum of money. The major asset of the partnership is the goodwill and
the partnership assets are insufficient to cover the debt. XYZ bank is now asserting
its claim to the personal assets of one of the partners L, who is a wealthy businessman.
Please advise the liability of the partners to XYZ bank.

Solution
Under Partnership Ordinance, partners are jointly and severally liable with the other
partners for all debts and obligation of the partnership. If the debt is not fully paid
after using partnership assets to satisfy partnership debts, then every partner assumes
unlimited liability incurred by the firm in the course of its business on a joint and
several basis (s. 11), meaning:

1. A creditor can sue either all partners for the debts of the business or any one partner
for the whole amount due.
2. If a partner by his own means satisfies the claims of a creditor, he can hold other
partners liable for the contribution of the debt under the Civil Liability
(Contribution) Ordinance (Cap. 377), according to the ratio or proportion they
agreed under the partnership agreement.

So in this case, L alone could be sued. If L repays the debt to XYZ bank, he can
hold the other two partners N and S liable to the full extent of their personal assets to
share his loss under the Civil Liability (Contribution) Ordinance.

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