Max Shreck hadn't flushed his old partner down the toilet, but it is implied that he had him murdered, and the Penguin had found the body, or at least the pieces. The Penguin doesn't state how he came across the stuff he found (included shredded documents implicating him in owning firetraps, as well as the toxic waste from the dump elsewhere in the abandoned zoo), but it is implied that, with the body and shredded documents, he had them disposed of elsewhere. I imagine that the Penguin had been stalking Shreck for some time.
Actually, in the original version, Shreck was actually the Penguin's undeformed brother.
Oh, and I loved Batman Returns. A bit too dark for some, but I enjoyed it.
Have you seen the size of human brains? They're hilarious!
-The Twelfth Doctor