Introduction
 
In Norazlina Mat Saad & Anor v Felcra Berhad [Civil Appeal No.: W-02(NCvC)(W)-946-06/2024]¹, the Court of Appeal, by a unanimous decision, set aside in part the High Court's finding that the 1st Appellant, an incoming partner, was jointly and severally liable for missing client funds that had largely been received and dissipated before she joined the firm. As a result of the Court of Appeal’s decision, the Appellants’ liability to the Respondent was substantially reduced from over RM8.3 million to RM278,271.40.
 
In coming to its decision, the Court of Appeal reaffirmed the statutory protection afforded by section 19(1) of the Partnership Act 1961, which provides: “A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.” This decision provides important guidance for the legal profession by clarifying that a firm's "continuing obligation" to account for client funds does not, by itself, make an incoming partner liable for wrongdoing predating her admission to the firm. Such liability may nevertheless arise where there is a separate and independent cause of action against the incoming partner, including where he or she was personally involved in or benefited from the wrongdoing.
 
Salient Facts
 
The dispute originated from a housing development known as Projek Perumahan Kampung Tersusun Generasi Kedua FELCRA Berhad Seberang Perak ("Project").  In November 2011, Felcra Berhad (the Respondent) (“Felcra”) appointed Messrs Sharidan & Co to handle the conveyancing and collection of purchase monies from the Project. In June 2013, the management of the Project files was transferred to Messrs Adzliana & Partners (the 2^nd Appellant) (“Firm”).
 
Between 2012 and 2016, substantial purchase monies were collected but not fully remitted to Felcra, notwithstanding that the Project has been completed and vacant possession of the properties had been delivered to the respective purchasers. By October 2016, approximately RM8.56 million had been collected from purchasers by the Firm. However, at the material time, the Firm's principal bank account recorded a balance of only RM110,000.
 
The 1^st Appellant, Norazlina Mat Saad (“Norazlina”) was a young lawyer who joined the Firm as a salaried partner on 19 January 2017. She was paid RM2,500 per month (which the High Court noted was equivalent to the market salary of a first-year legal assistant), had no access to or control over the Firm’s bank accounts, was not a bank signatory, and had no share in the Firm’s equity or profits. She was also not involved in the Project files, which related to work undertaken before she joined the Firm. Evidence was also led during trial that Felcra’s officers had never dealt with or heard of Norazlina before the litigation commenced. Her name also did not appear on the Firm’s letterhead.
 
On 26 October 2017, while Norazlina was a partner, the 2nd Defendant (one of the partners involved in the Project), issued a letter under the Firm's letterhead to Felcra’s solicitors stating that the Firm was still checking the amount of client monies held in its account and undertaking to forward full details of those monies, and how they would be transferred, to Felcra's new solicitors. This undertaking was never fulfilled.
 
Felcra subsequently commenced proceedings against the Firm, Norazlina and several other defendants, including Messrs Sharidan & Co and the partners of both firms, seeking more than RM8.3 million in unaccounted purchase monies and loan disbursements, together with damages and costs.
 
Decision of the High Court
 
The High Court found that all the defendants, including Norazlina, were jointly and severally liable to Felcra, holding that once a firm's obligation to account remains undischarged, that continuing obligation binds every partner of the firm regardless of when he or she was admitted.
 
The High Court considered itself bound by the Court of Appeal's decisions in Oriental Bank Bhd v Nordin Hamid & Ors [2011] 5 CLJ 237 (“Oriental Bank Bhd”) and Tetuan Khana & Co v Saling Lau Bee Chiang & Ors [2019] 3 MLJ 189 (“Tetuan Khana & Co”). On that basis, it rejected Norazlina’s reliance on section 19(1) of the Partnership Act 1961, which provides that a person admitted as a partner into an existing firm does not thereby become liable to the firm’s creditors for anything done before becoming a partner. The High Court held that Norazlina’s liability was co-extensive with that of the Firm and its other partners, notwithstanding that she had joined the Firm later (after a substantial portion of the client funds had already been dissipated) and had not been involved in the Project files.
 
The result was that Norazlina, together with the Firm, faced joint and several liability of RM8,383,551.54, interest and costs on a full indemnity basis, notwithstanding the High Court's own finding that she had no personal involvement in, or knowledge of, the underlying wrongdoing. The High Court did, however, decline to hold Norazlina liable for exemplary damages, and separately allowed her claim to be fully indemnified by two of the other partners who had held her out as a partner of the Firm.
 
Norazlina and the Firm appealed against the High Court's decision.²
 
Decision of the Court of Appeal
 
The Court of Appeal unanimously allowed the appeal in part and held that Norazlina's liability was confined to monies received by the Firm after she became a partner on 19 January 2017.
 
The Court explained that a law firm remains responsible for accounting for its client’s money, regardless of which partner originally misappropriated or dissipated it. So long as the firm holds monies belonging to the client, the firm and its partners remain liable to return them, subject to any lien the firm may have for unpaid fees. In this regard, the Court agreed that Oriental Bank Bhd correctly recognised a continuing obligation on the part of a firm to account to its client.
 
The Court, however, held that the true question was the extent of the incoming partner's liability. Where a wrongful act is committed by an existing partner before a new partner joins, and the new partner had no connivance or involvement in that wrongful act, section 19(1) of the Partnership Act 1961 operates to absolve the new partner of liability arising from that wrongful act, unless the client can establish a separate and independent cause of action against the new partner personally.
 
Applying that principle, the Court distinguished Tetuan Khana & Co, the authority which the High Court had treated as binding it to find Norazlina liable. The Court agreed with the Appellants’ submissions that in Tetuan Khana & Co, there was a specific finding of fact, affirmed on appeal, that the incoming partner had personally misused, mismanaged and misappropriated the trust funds in question for his own benefit. The plaintiffs therefore had a direct and independent cause of action against him, quite apart from his status as an incoming partner, and section 19(1) did not absolve him from liability arising from that cause of action.
 
By contrast, the Court found that Norazlina had no involvement whatsoever in the wrongful acts of the Firm’s other partners. There being no separate and independent cause of action against her personally arising from conduct that occurred before she joined the firm, section 19(1) applied to shield her from liability for anything done, or monies received and dissipated, before 19 January 2017.
 
The Court nonetheless held that section 19(1) does not apply to matters occurring after a partner's admission. Since there were loan disbursements which continued to be received by the Firm after Norazlina became a partner, and a balance of RM278,271.40 remained unaccounted for out of monies indisputably received by the Firm after that date, the Court held both Norazlina and the Firm liable to Felcra for that sum, as the Firm remained a trustee of those monies for Felcra's benefit.
 
The Court also considered the Firm's letter of undertaking dated 26 October 2017, which Felcra had relied on, amongst others, as an independent source of liability against Norazlina. The Court held that the wordings of the letter did not create an undertaking to transfer the funds standing to the credit of the client account. In any event, since the monies referred to had already been dissipated without Norazlina's involvement or connivance, the letter did not impose on her a personal obligation to indemnify Felcra for monies that had already gone missing before she joined the Firm.
 
Accordingly, the Court of Appeal allowed the appeal in part and substituted the High Court’s judgment sum against the Firm and Norazlina with RM278,271.40. The Court also set aside the High Court’s costs order against them and ordered Felcra to pay the Appellants costs of RM50,000. All other orders made by the High Court against the other defendants remained undisturbed — including its dismissal of Felcra's claim for exemplary damages against Norazlina and its order that two of the other partners of the Firm fully indemnify Norazlina against the judgment entered against her.
 
Key Takeaways
 
This decision confirms that a firm's continuing obligation to account to its client does not, without more, translate into personal liability for every partner who happens to be a partner of the firm at any given time. The Court of Appeal gave effect to the plain words of section 19(1) of the Partnership Act 1961: the word "thereby" means liability for past wrongdoing is not imputed to an incoming partner simply by reason of admission to the partnership. An incoming partner is protected for wrongdoing occurring, and monies dissipated, before her admission.
 
At the same time, Section 19(1) does not afford blanket protection to incoming partners. The protection is displaced where the client can establish a separate and independent cause of action against the incoming partner personally, for example, where it can be shown on evidence that he or she personally benefited from, or was personally involved in, the wrongdoing.
 
Finally, this decision is a timely reminder to young lawyers that, before joining a firm, an incoming partner should conduct due diligence on the firm, negotiate and obtain appropriate indemnities from the existing partners, and ensure that proper accounting procedures are in place. While such indemnities do not prevent liability to third parties, they may provide recourse against the existing partners. The importance of due diligence was underscored by the High Court, which observed that although the title of partner carries prestige and professional recognition, "it behoves any party to carry out due diligence on the firm he or she is going to form or join as a partner or be held out as a partner and weigh the risks he or she is willing to undertake as against the prospective rewards".
 
Claudia Cheah (Partner) and Karen Tan (Senior Associate) of the Dispute Resolution Practice of Skrine represented the First Appellant and the Second Appellant in the proceedings in the Court of Appeal.
 
Case Note by Karen Tan (Senior Associate) of the Banking and Finance Litigation Practice of Skrine.
 
 
Note: As the Respondent did not seek leave to appeal to the Federal Court against the Court of Appeal’s decision within the prescribed time frame, the Court of Appeal’s decision is final.
 
 

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