Indian Partnership Act - Outgoing partners (Section 32-38)

Introduction

In previous post, we have discussed how new partner can be introduced to the partnership firms. In this blog we will talk about how partner may cease to be partner, or how partner can be kicked out of partnership.

Section 32 to 38 deals with this aspect. It also covers what kind of liabilities and rights the outgoing partner may incure.

Partner can cease to be a partner and could terminate the relationship with partnership firm in following four ways

  1. Retirement
  2. Expulsion
  3. Insolvency
  4. Death
We will see each of them in bit detail.

Retirement of a partner

Retirement is voluntary withdrawal or severing a relationship of partnership firm. May be partner have other priorities like family, friends or he may want to go to Himalaya! In such cases he can terminate the relationship with partnership firm.

There are 3 ways in which partner can retire

1) With the consent of all other partner

Partner cannot retire on whims and fancies of his own whenever he decides to retire. The general rule is that he should take permission of all other partners. Consent may be expressed or implied
2)In accordance with the express agreement

Partners could have an agreement related to retirement. For example they could say that "Partner X will be retired in 2018, Y in 2025" etc in partnership deed. They might also have an agreement that Partner may retire by consent of majority or some of the partner
3)Partnership at will by notice

We have seen partnership at will. It's partnership where there is not fixed duration, nor anything clear about when partnership will terminate.
In such cases partner can retire by giving notice to all other partners.


All right, this whole retirement is comes into picture when firm continue after retirement. Means firm should not be dissolved after retirement of partner.

 Now there are two things to consider about liability. Before the retirement and after the retirement.

Liability for acts before retirement

Section 32(2) deals with this aspect.
In general partner will be liable for all the acts of firm till the date of his retirement. However by an agreement he could be discharged of such liabilities.

Let's talk of an example. There are four partners A, B, C and D.  They took a loan from a bank say State Bank of India of 4 lakhs. Loan is not paid yet. Since liability is unlimited everybody is liable. But such liability could be discharged if there is an agreement between State Bank of India and other Partners that liabilities will be discharged in case of retirement. Meaning if A retires he will no more be liable.

Law people invented term for this and call it novation, meaning substitution of old debtor with new one!

Liability for acts after retirement

How will third parties dealing with partnership firm will come to know whether partner is retired. What if retired person continues to deal with other as a partner ?
Section 32(3)  provides that public notice should be give of retirement. Section 32(4) talks about who can give the public notice, which is either partner of reconstituted firm or retiring partner.

The proviso of 32(2) talks about dormant partner.Dormant partner, in-active partner, sleeping partner all these species are not needed to give public notice because they never dealt with other parties as active partners. So they can retire peacefully! Why ?

Enough about retirement. Now let's discuss expulsion of a partner.

Expulsion of a partner (Section 33)

Section 33 :
A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners.
 It says that partner cannot be expelled from a firm by any majority of the partners, except when it is necessary to expel in good faith, for the benefit of the firm.

Also, there should be express contract about kicking out any partner.

There is this interesting case of Blissett V Daniel, wherein agreement was made that 2/3 majority can expel any partner. Then some partner didn't like view of one of the partner and carry out planning to expel him. This expulsion was invalidated. You can never expel a partner because you don't like him.!

Insolvancy (Section 34)

Liability of partner is unlimited. Meaning if Bank could not recover loan from firm's asset, it could recover from private property.  But what if person becomes insolvent and not capable to serve any debts ?

Answer is he will no more be a partner. If court adjudicated partner to be insolvent, he will no more be a partner.

Whether firm can be dissolved or continue depend upon contract between partners. According to Section 42(d), unless the partners agree otherwise, a firm is dissolved by the adjudication of partner as insolvent.

 Death of partner (Section 35)

After death, partner will be no more partner. Of course, he cannot operate from grave!

Dissolution of firm is depend upon other partners. If they agree to continue they can continue. But there will be no liability of property of dead partner, nor there will be any liability of his legal representatives or heir. 

Rights of outgoing partner

 Can expelled partner continue a competing business ? What are restriction on outgoing partners ? If He starts competing business can he lure the client of earlier business ?
Section 36 provides answer to these questions and discuss in details about rights of outgoing partner.

Competing Business

Clause 1 provides that outgoing partner may continue to carry on competing business and he can also advertise such business. However there are certain restriction

  1. He cannot use the name of the firm
  2. He cannot say to other people that I am still a partner and do the business with me. In short he cannot mislead public
  3. He cannot use clients of his earlier firm, solicit them, advertise them, lure them, induce them. :)
This restrictions are in place to provide the security to existing firm. Otherwise think of this, 4 partner started innovative business and started making tons of money. But profit is shared. What if one of them just want to earn it alone. To avoid such situation this restriction are in place. You cannot go to supreme court for breach of fundamental right under article 19 (1) (g).

The thing to note here is any agreement that would restrict or restraint outgoing partner would be valid. But restraints should be reasonable.

Right to share subsequent profits

When partner terminate his relationship with the firm whether by retirement, expulsion or death, his share may not be immediately payable to him as there might be combined properties of partner.

Section 37 provides for sharing of profits. Partner's share can be be recovered in two ways.
  1. Claim such as proportional to value of the share of property of partner. For example total property of firm is 10 Lakh, and retiring partner have 10% share, he will get proportional share or a share as attributable to his property
  2. To claim an interest at the rate of 6% per annum on amount of his share in the property.
So this is it about incoming and outgoing of the partner.


Thanks
Legalfundaa



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