(..7 d..)

INCOMING AND OUT-GOING PARTNERS

Table of Contents

(S.31-38)

QUESTION BANK.

Q.1. What are the rights and obligations of retiring partners?

Q.2. Discuss different modes of retirement from partnership.

SHORT NOTES

An expelled partner.
Rights of partners.

SYNOPSIS

INCOMING PARTNER (S. 31).

Liability of new partner: – (31(2)).

OUTGOING PARTNER: –
Modes of retirement: –
By consent (S. 31):-
By agreement (S. 32):-
By Notice (S. 32): –
By Insolvency (S.34): –
By Death (S. 35): –
By Expulsion (S. 33):-
Liability of retied partner (S. 32):-
Liability for acts done before retirement (S. 32 (2)): –
Liability for acts done after retirement (S. 32(3)).
Rights of out-going partners: –
Right to compete (S.36)-
Right to share subsequent profit (S. 37):-

I. INCOMING[1] PARTNER (S. 31):-

Any new partner can be admitted into a firm with the consent of all the other partners (S. 31 (1)). Partners’ relationships are those of trust and confidence; only such a person can be admitted in whom all the partners have confidence. This is, however, subject to the contrary agreement between the partners (Partnership deed).

In Byrne Vs. Reid[2]

Facts: – The articles of partnership (partnership deed) between two partners contained a clause that one would have the right to bring his son into the partnership upon attaining 21 years of age. However, the other partner refused to accept the son.

The court held that the son of one partner can not be restricted from becoming a partner because the partnership deed is a contract.

Liability of a new partner: – (S.31(2)).

A person introduced as a partner in a firm does not thereby become liable for any act of the firm before he becomes a partner.

Thus, he is not liable for the firm’s pre-existing debt before his admission as a partner. He may, however, agree with his partners to be liable for the debts incurred up to the date of his admission. However, such an agreement is binding only upon the partners and does not give any creditor the right to sue the new partner for past debts.

II. OUTGOING[3] PARTNER: –

An outgoing partner is a partner who has retired from a firm, and the remaining partners continue the business.

A. Modes of retirement: –

A partner may retire from the firm in any of the following ways-

1. By consent (S. 31):-

A partner may retire at any time with the consent of all other partners.

2. By agreement (S. 32):-

Where there is an agreement between partners about retirement, a partner may retire in accordance with the terms of that agreement.

3. By Notice (S. 32): –

Where the partnership is at will, a partner may retire by giving his partner a notice of his intention to retire. Such notice should be in writing and signed by the (retiring) partner and should be served upon all the partners.

4. By Insolvency (S.34): –

This section has made two points. First is that the partner ceases to be a partner from the date on which he is adjudicated as insolvent; it doesn’t matter whether the firm is thereby dissolved or not.

Secondly, where the firm is not dissolved and consequently remains in business, the insolvent partner’s estate is not liable for any act of the firm after the date of his insolvency, nor is the firm liable for any subsequent act of the insolvent partner.

5. By Death (S. 35): –

When any partner dies, he ceases to be a partner. The firm may or may not thereby be dissolved. The deceased’s estate deserves to be protected from somewhat further liability in respect of any act of the firm after his death.

In Bagel V. Miller[4]

The estate of the deceased partner was held not to be liable in action for the price of goods sold and then delivered where the order for goods was given during the deceased partner’s lifetime but the delivery did not take place until his death.

6. By Expulsion[5] (S. 33):-

This section provides that a partner can not be expelled from a firm by any majority of partners. But in exceptional cases, the partner may be expelled if the partners have exercised the power of the explosion given to them by the partnership deed and such power is exercised in good faith by them.

In Blisset V. Daniel[6]

Facts: – In the exercise of their power conferred in most unfettered terms, most partners expelled a partner on the grounds that he opposed the appointment of one of the partner’s sons as manager.

The Court held that the expulsion was unwarranted and an abuse of power.

B. Liability of retired partner (S. 32):-

1. Liability for acts done before retirement (S. 32 (2)): –

A retired partner remains liable to the creditors for the acts of the firm done before and up to the date of his retirement. However, his co-partners and such third parties may release him from such debts by an agreement.

Such an agreement may be implied, which may be inferred from the fact that the creditor continues a deal with the reconstituted firm after he learns of the retirement of such a partner.

2. Liability for acts done after retirement (S. 32(3)).

A retiring partner is liable for the acts of a firm, even after retirement, until he gives public notice of his retirement. He is liable for holding out if he doesn’t give public notice of his retirement. But he is not liable for any act the firm did after such notice. He is presumed to have retired in the eyes of a third person only after such public notice of retirement is given.

However, the retired partner is not liable, even though public notice of his retirement is not given, if the party deals with the firm without knowing that the person retiring is a partner. So, the liability of the retiring partner continues up to the date of public notice.

In P. V. Gandhi V. Gitanjali[7]

Facts: – Long after the retirement of one of the partners, without public notice, other partners committed an act of insolvency, for which the retired partner also sought to be declared insolvent.

By rejecting the plea, the court held that no public notice is necessary in the case of a deceased partner, an insolvent partner or a dormant partner.

C. Rights of out-going partner: –

Following are some of the rights of a retiring partner.

1. Right to compete[8] (S.36)-

An outgoing partner may carry on a business competing with that of the firm, and he may advertise such business, provided he can not-

a) Use the firm name.
b) Represent himself as carrying on the business of the firm, or
c) Solicit the customers of the firm who were dealing with the firm before he ceased to be a partner.

This section is nothing but an act of the legislature to balance the interest of the firm as well as of the individual by allowing them to compete with reasonable restrictions.

So the retired partner may set up his new business at the place even next door to the firm, but he can not use the firm name, hold out as carrying the firm’s business or solicit customers of the firm.

In Trego V. Hunt[9]

The retiring partner was restrained from drawing the list of the firm’s customers to solicit them for his own business.

2. Right to share subsequent profit (S. 37):-

When the partner retires from the firm for any reason, it is the duty of the remaining partners to pay out the share of property and profits to the retired partner or to his representative (if the retired partner has died). But sometimes, the continuing partners do not do so for any reason whatsoever. Consequently, the capital and share of profit which should have been paid remain in the firm’s business with its earning potential.

In the above case, the partner who retired has two options.

i) He may receive interest at the rate of six per cent per annum on the amount of his share in the firm’s property. Or,
ii) He may demand such a share of the profit as may be attributable to the use of his share of the property of a firm

*****

[1] नविन भागिदार किंवा भागिदारीत येणारा नविन व्यक्ती. [कोई नया साथी या साझेदारी में शामिल होने वाला कोई नया व्यक्ति।]

[2] 1902.

[3] भागिदारीतून बाहेर पडणारा व्यक्ती. [साझेदारी छोड़ने वाला व्यक्ति।]

[4] 1903 KB.

[5] हाकलून दिल्याने. [बाहर निकाले जाने से।]

[5] 1853.

[7] (AIR 1973 Mad 115.)

[8] स्पर्धा करण्याचा अधिकार. [प्रतिस्पर्धा का अधिकार।]

[8] 1896.