No Profit and Loss Account: Who Loses When a Partnership Ends?

This case is a reminder that partners who share profits must also keep proper accounts.

Under the Partnership Act 1961, partners share the capital and profits of the business equally. This is the default rule, unless the partners agreed otherwise in writing, verbally or through how they ran the business.

Equal sharing does not depend on who put in more money. Different roles, unequal capital or being paid for work does not, on its own, take away a partner's equal share. A partner who says they agreed to share differently must prove it.

The same law also says every partner must give the others true accounts. Simply put, these are records showing what the business received and whether it made a profit or a loss. One's own notes on where the money went are not enough.

In this case, two partners registered a construction business. One handled the clients, quotations, money and accounts. The other put in no capital, worked on site and was paid from the first partner's personal account. When the business ended, the site partner asked for half the profits. The Sessions Court said he was only a worker, and that equal sharing needed equal capital.

The High Court disagreed. In his own court papers, the other partner had admitted they were both partners. He could not prove any deal to share profits differently. So the site partner was entitled to half the profits.

But being entitled to half is not the same as getting paid. No profit and loss account was ever prepared. The money in the bank was also used to pay business costs. So nobody could tell how much profit there was. The Sessions Court also has no power to work out partnership accounts. His money claims failed.

The partner who kept the books did not get away either. He never prepared a profit and loss account or appointed an accountant. The court found he did not give true accounts. He was ordered to pay RM50,000 as nominal damages, plus interest and costs. Nominal damages mark that a right was breached, even when the exact loss cannot be proven. No fraud or misuse of money was found against him.

Both partners lost. One won the principle but not the money. The other paid for not keeping proper accounts.

If you wish to get more details, you may refer to the case of Kalai Mannan a/l Ramasamy v Rajkumar a/l Palmanaphan, where the court looked at profit sharing and accounts between partners.

Our team at August Advisory can help keep your partnership accounts and profit and loss statements in order. WhatsApp 010-246 2151.