Incoming and Outgoing Partners

Section 31. Introduction of a partner.

31(1).

• The rule applies unless the partnership contract provides otherwise and is also subject to the provisions of Section 30.

• A new person cannot be made a partner in the firm automatically.

• The Consent of all existing partners is required to introduce a new partner into the firm.

31(2).

• A person who is newly admitted as a partner is not responsible for acts of the firm done before he became a partner.

• The new partner’s liability starts only from the time he joins the firm.

• This rule is also subject to the provisions in Section 30.

Section 32. Retirement of a partner.

32(1).

• A partner may retire from the firm in the following ways:

  1. (a). With the consent of all the other partners.

  2. (b). In accordance with an express agreement between the partners.

  3. (c). If the partnership is at will, then he can retire by giving a written notice to all the other partners stating his intention to retire.

32(2).

• A retiring partner can be released from liability to a third party for acts done before his retirement.

• This release must be based on an agreement between:

  1. The retiring partner.

  2. The concerned third party.

  3. The partners of the reconstituted firm.

• The agreement can be express, or can be implied from the course of dealings between the third party and the reconstituted firm.

• It is impertinent that the third party becomes aware of the partner’s retirement in order to release the liability of the retiring partner.

32(3).

• A partner’s retirement does not automatically end liability to third parties.

• After retirement, the retired partner and the continuing partners are still treated as partners in relation to third parties.

• This liability covers acts done after the retirement.

• The acts must be of a kind that would have been considered acts of the firm if they had been done before the retirement.

• This continuing liability remains until a public notice of the retirement is given.

• The retired partner is not liable if a third party deals with the firm without knowing that the retired person was ever a partner.

32(4).

• Notices under 32(3) may be given by the retired partner or by any partner of the reconstituted firm.

Section 33. Expulsion of a partner.

33(1).

• A partner cannot be expelled from the firm merely by a majority decision.

• Expulsion is allowed only if the partnership contract gives such a power.

• Even then, the power must be exercised in good faith.

33(2).

• An expelled partner is treated the same as a retired partner for certain legal purposes.

• The rules contained in section 32(2), 32(3), and 32(4) apply to an expelled partner.

• These provisions apply as if the expelled partner had retired from the firm.

Section 34. Insolvency of a partner.

34(1).

• If a partner is declared (adjudicated) an insolvent, then he automatically stops being a partner in the firm.

• This happens on the date the insolvency order is passed.

• It applies whether or not the insolvency results in dissolution of the firm.

34(2).

• The partnership agreement may provide that the firm will continue even if a partner becomes insolvent.

• If such a provision exists, the firm is not dissolved by the partner’s insolvency.

• In that case, the estate of the insolvent partner is not liable for acts of the firm done after the insolvency order.

• Likewise, the firm is not liable for any acts done by the insolvent partner after the date of the insolvency order.

Section 35. Liability of estate of deceased partner.

• The partnership agreement may provide that the firm will continue even after the death of a partner.

• If such a provision exists, the firm is not dissolved by the partner’s death.

• In that case, the estate of the deceased partner is not liable for any acts of the firm done after his death.

Section 36. Rights of outgoing partner to carry on competing business.
Agreements in restraint of trade.

36(1).

• An outgoing partner may start and run a business that competes with the firm and may advertise it.

• However, unless the partnership contract allows otherwise, the outgoing partner must not:

  1. (a). Use the firm’s name.

  2. (b). Present himself as continuing or carrying on the firm’s business.

  3. (c). Approach or solicit customers who were dealing with the firm before he stopped being a partner.

36(2).

• A partner can agree with the other partners that after leaving the firm, he will not carry on a similar business.

• This restriction can be limited to a specific time period or to specific local areas.

• Even though section 27 of the Indian Contract Act generally restricts such agreements, this kind of agreement is valid.

• Provided that such restrictions imposed are reasonable.

Section 37. Right of outgoing partner in certain cases to share subsequent profits.

• Under circumstances a partner dies or otherwise stops being a partner due to retirement, expulsion, insolvency etc. then:

  1. The surviving or continuing partners can continue the business of the firm.

  2. They use the property of the firm to run the business.

  3. They do this without making a final settlement of accounts with: The outgoing partner or the estate of the deceased partner.

• This would not be the case if there is an agreement between the partners that provides otherwise.

Right of the Outgoing Partner or His Estate

• The outgoing partner (if alive), or the legal representatives of the deceased partner, are entitled to compensation.

• Compensation is granted for the use of the outgoing partner’s share in the firm’s property.

• The outgoing partner or his estate has an option to choose one of the following:

• (a).

  1. They can claim a share of the profits made after the partner ceased to be a partner.

  2. This share must be proportionate to the use of the outgoing partner’s share in the firm’s property.

• (b).

• Instead of profits, they may claim interest at 6% per annum.

• This interest is calculated on the value of the outgoing partner’s share in the firm’s property.

Provided that:

• The partnership agreement may contain a clause.

  1. This clause gives the surviving or continuing partners an option to purchase the interest of: A deceased partner, or an outgoing partner.

• If this option is properly and fully exercised according to the contract then:

  1. The deceased partner’s estate, or The outgoing partner or his estate, loses the right to claim any further or additional share of profits.

• Once the option is validly exercised:

  1. The outgoing partner or estate is fully compensated as per the contract.

  2. No further claim for profits or interest can be made under the earlier rule.

• If a partner claims to act under the option but does not comply with the contract in all material respects (important terms), then:

  1. The protection of this proviso is lost.

• In such a case, the partner who failed to comply becomes liable to account then:

• The outgoing partner or estate can again choose between:

  1. A share of profits attributable to the use of their property.

  2. interest at 6% per annum.

Section 38. Revocation of continuing guarantee by change in firm.

• A continuing guarantee may be given either to the firm or to a third party for the firm’s transactions.

• If there is no agreement stating otherwise, the guarantee does not continue indefinitely.

• When there is any change in the constitution of the firm such as admission, retirement, or death of a partner then:

  1. The continuing guarantee is automatically revoked for future transactions.

  2. The revocation takes effect from the date of the change in the firm’s constitution.