Incoming & Outgoing Partners

Table of Contents
Introduction.................................................................................................................................................2
Essentials.....................................................................................................................................................2
Introduction of a partner-New Partner.......................................................................................................2
Break in Identity of Firm by Addition of New Partners............................................................................2
Liability of a Incoming Partner.................................................................................................................3
Retirement of a partner. Sec 32 —(1) A partner may retire,—....................................................................3
Section 32(1): Retirement in a Partnership-at-Will..................................................................................4
Notice of Resignation..............................................................................................................................4
Liability of a Retiring Partner...................................................................................................................4
Section 32(2): Obligation of Retiring Partner...........................................................................................5
Section 32(3)............................................................................................................................................6
(i) Notice of Retirement...........................................................................................................................6
Effect of Retirement of Partner...............................................................................................................6
Retirement of a Partner and Valuation of his Share................................................................................6
Expulsion of a partner.................................................................................................................................7
Insolvency of a partner................................................................................................................................7
Dissolution of Partnership.......................................................................................................................8
Liability of estate of deceased partner........................................................................................................8
Right of outgoing partner to carry on competing business.........................................................................8
Agreement in Restraint of Trade.............................................................................................................9
Remedy for Breach of Agreement...........................................................................................................9
Right of outgoing partner in certain cases to share subsequent profits......................................................9
Rights of Retiring Partner......................................................................................................................11
Rights and Liabilities of an Outgoing Partner.........................................................................................11
Revocation of continuing guarantee by change in firm.............................................................................11
Bibliography…………………………………………………………………………………………………………………………………………..12

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Introduction
The law of partnership is contained in the Indian Partnership Act, 1932, which came into force on 1 st
October 1932. The act is mainly based on English Partnership act 1890 and practically codifies the Indian
law of partnership.

Partnership is defined under Sec- 4 of this act:

“ Partnership is the relation between persons who have agreed to share the
profits of a business carried on by all or any one of them acting for all.”

Essentials
Following are the essentials which are required for a valid partnership:

 Partnership is an association of two or more persons.

 It must be result of an agreement between two or more persons.
 The agreement must be to carry on some business.
 The agreement must be to share profits of the business.
 Business must be carried on by all or any one of them acting for all.

Introduction of a partner-New Partner

Object of section 31(1): The general idea behind section 31(1) of the Act is that the consent of all the
existing partners is required to the introduction of a new partner so that the firm may work
harmoniously. A new partnership may be by an oral agreement or in writing. 1

Break in Identity of Firm by Addition of New Partners

Whenever the constitution of a firm changes by addition of new members as partners, there is a break
in the identity of the firm whether or not the name continues to be the same. After a change in the
constitution of the firm by addition of new partners what formerly was the property of the old firm does
not continue to be the property of the old firm. When the change in the constitution is merely a paper
transaction and not a genuine and real transaction, the court would disregard the change in the
constitution of the firm and would regard the property of the old firm in spite of the apparent though
real, change in the constitution. Where, however, there is a real change in the constitution and the new
firm is a new identity there seems to be no justification for the view that whatever was the part of the
property of the old firm continues to be its property in spite of such change. If the properties could not
reach in the hands of the old firm, it could not be attached obviously in the hands of the new firm. 2

1Meenakshi Achi v. P.S.M.S Chettiar, AIR 1957 Mad 8.

2 Gouri Sankar v. CM, Bank Ltd., AIR 1959 Cat 262.

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Liability of a Incoming Partner

To determine the issue whether an incoming partner is liable to an existing creditor of the firm, two
questions are to be answered. First, whether the new firm has assumed the liability to pay the debt;
secondly, whether the creditor has agreed so accept the new firm as his debtor and to discharge the old
partnership from its liability. A creditor must prove both the said conditions in order to hold the new
firm liable for his debts.3

In the case of a partnership consisting of only two partners contract to continue partnership by
admitting legal representative of nominee of deceased partner on the death of one partner does not
make a partnership to exist for taking in new partner. Surviving partner continuing business of
partnership with the members of deceased partner's family does not constitute a firm within section
16(f)(6) of the Income-tax Act.4

An incoming partner can be held liable for existing debts of the firm if he has assured liability and the
creditor has accepted him as a debtor. Where documents on record show that new partner had
acknowledged pre-existing liability and was also trying to clear the dues and the act of the Bank was not
withdrawing the credit facilities of newly constituted firm, all those would show that the new partner is
liable to pay pre-existing debts of the firm. Though the new partnership deed did not provide for
assumption of such liabilities by the new partner, yet, it was held that it was immaterial for
determination of this question.5

Retirement of a partner. Sec 32 —(1) A partner may retire,—

(a) With the consent of all the other partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.

A retiring partner may be discharged from any liability to any third party for acts of the firm done before
his retirement by an agreement made by him with such third party and the partners of the reconstituted
firm, and such agreement may be implied by a course of dealing between such third party and the
reconstituted firm after he had knowledge of the retirement.

Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as
partners to third parties for any act done by any of them which would have been an act of the firm if
done before the retirement, until public notice is given of the retirement. Provided that a retired partner
is not liable to any third party who deals with the firm without knowing that he was a partner. Notices
under sub-section (3) may be given by the retired

3 Meenakshi Achi v. P.S.M.S. Chettiar, AIR 1957 Mad 8; see also W.T. Commr. v. Padampat Singhania, 1981 Tax LR 683.
4 Commissioner of Income-tax v. G.S. Mills, AIR 1961 SC 24.
5 B.M. Devaiah v. Canara Bank, AIR 2003 Kant 143.

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Section 32(1): Retirement in a Partnership-at-Will

A partnership in a partnership-at-Will cannot retire except by giving a notice in writing under section
32(1)(c) of the Act.6

Notice of Resignation
Section 32(1) requires that there should be a notice in writing which involves the idea that the notice
should reach the other partners. But if the partnership is not at Will, a notice of registration given by one
partner will not serve any purpose.7

Liability of a Retiring Partner

Even if the notice of retirement is given, still the partnership cannot be absolved from the liability by
giving his unilateral notice of the retirement. He is required to satisfy the court that after the notice of
retirement the creditor has acquiesced in that position and has agreed to get his dues satisfied from the
newly constituted partnership firm.8

Under section 32(2) of the Indian Partnership Act, 1932 the liability of a retiring partner as against the
third party would be discharged only if there is an agreement made by the retiring partner with the third
party and partners of the reconstituted firm, of course an agreement could be implied by the course of
dealing between the third party and the re-constituted firm after the retirement of the partner. 9 In that
case it was held further that if a creditor takes a new security for the debt from the continuing firm, then
it shows his intention to deal with the continuing partner for debts owed by the firm. In absence of such
express or implied agreement, a public notice is necessary.

A partnership firm took overdraft facility and medium term loan of the firm. The amount of liability to
the Bank remained unpaid. The defendant in the meantime retired from the partnership firm. The Bank
filed a suit for recovery of the loan. The retirement of the defendant was duly intimated to the Bank.
There was subsequent agreement between the Bank and other remaining partners that they undertook
as partners to remain liable to the Bank. The Bank did not take the signature of the defendant retiring
partners for revival letters in respect of the loan and also in the subsequent agreement made by and
between the Bank and the existing partners. It was held that the partners of the reconstituted firm at
once would be liable for debts of the old firm and that the retiring partner was said to have been
discharged from liability to the Bank. 10

6 Banvari Lai v. Roop Kishore, AIR 1945 All 332.

7 Badrivisha! v. Naming Rao, AIR 1959 AP 116.
8 Jayantilal v. Mirandas & Sons, AIR 1983 Bom 226.
9 Syndicate Bank v. R.S.R. Engineering Works, (2003) 6 SCC 265.
10 K], George v. State Bank of Travancore, AIR 2002 Ker 214.

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Meaning of the Expression "Dissociate from the Partnership Business"

A partnership business is run in accordance with the terms of the contract of partnership. The terms,
inter alia, envisage a situation that a partner can retire from partnership. The expression "dissociate
from the partnership business" envisages a situation where a partner wants to retire from business. 11

Section 32(2): Obligation of Retiring Partner

Even where parties agree amongst themselves that the continuing partners shall be liable for the
obligation of a retiring partner, such an agreement cannot per se affect the rights of the creditors being
res inter alias acta.12

Effect of Retirement of One Partner out of Two Partners

Where there are only two partners the appropriate term to describe the severance by one partner of his
connection with the business of the partnership is dissolution and not retirement. The expression
"retirement" is appropriate if there are more than two partners at that time and the partners other than
the retiring partner can continue the business of the firm. 13

No Provision for Separation of Share

The Act does not make any provision of the separation of the share of a retiring partner and the
intention may be that this shall be determined by agreement between the partners. A partner who is
not a minor, and has not obtained the agreement of the other partners to severance of his share, can
only secure separate possession of his share by seeking dissolution and in such a case the rules laid
down in sections 46, 48 and 49 become applicable. 14

No assignment of Retiring Partner's Right in Continuing Partners

Retirement from the partnership by one partner may result in fact that the business vests in the
continuing partners exclusively and it does result in fact that the retiring partner ceases to have any
right, title and interest in the business as such; but that does not mean that the retiring partner has
'assigned' the business with the stock-in-trade and goodwill thereof in favour of the remaining
partners.15

Valuation of Goodwill on Retirement of a Partner

For determination of share of retired partner, the super-profit method is proper for valuation of
goodwill in particular facts of a case.16

11 Vishnu Chandra v. Chandrka Prasad, AIR 1983 SC 523.

12h Meenakshi Achi v. P.S.M.S. Chettiar, AIR 1957 Mad 8.
13 Vedachala v. Rangaraju, AIR 1960 Mad 457.
14 Ajudhia Pershad v. Sham Sunder, AIR 1947 Lah 13 (FB).
15 Kusum Bhimrao v. Javakar Lalchand, AIR 1982 Bom 245.

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Section 32(3)

(i) Notice of Retirement

The question whether a person dealing with a firm has notice of the dissolution of the firm by the
retirement of one of partners from it is one of fact and the onus of proving that fact is plainly on such
partner and this onus is discharged if there is evidence to the effect that notice was given. 17

(ii) Object of Public Notice:

Public notice is intended only to serve a purpose, namely, to bring home to the persons concerned the
fact of retirement. That purpose will undoubtedly be served in a better way by personal or actual
notice.18

Effect of Retirement of Partner

(1) A provision in the partnership deed for retirement is not inconsistent with a partnership-at-Will
though firm constituted by only two partners. 19

(ii) Liability of retiring partner in absence of public notice: Liability does not extend to his being liable
to be adjudicated as insolvent for the act of the firm at a subsequent date. 20

(iii) Retiring partner: He is not discharged to pay income-tax on reconstitution of the firm. 21

(iv) A retiring partner can avoid liability by giving public notice or retirement. But absence of such
notice cannot mean that a partner even after retirement continues to be liable to third parties. 22

(v) Where the new firm assumes liability to pay the debt due to the old firm and the creditor agrees
to accept the new firm as his debtor to discharge the old partnership firm from its liability, the partners
of the new firm would be liable to pay the creditor. 23

Retirement of a Partner and Valuation of his Share

A partner retires from a firm by agreeing to sell his share in partnership firm. The firm is reconstituted
thereafter. The Commissioner is appointed by the court for ascertaining the value of his share. The
relevant date for such ascertainment is the date of which the partner retires and not the date on which
the Commissioner makes the valuation. The unpaid share of the retiring partner was a debt payable with
interest whenever paid.24

16 Mchru Belgam Vala v. G. Bell & Co., AIR 1983 Mad 351.
17 Kala Ram v. P.N.B. Ltd., AIR 1935 PC 14.
18 Central United Bank v. Venkntarama, AIR 1963 Mad 302.
19 Talakchand Ktrnji Vora v. Keshavlal, AIR 1973 Cal 279.
20 Vcerappa Chcttiar v. Kalidoss Chcttiar, AIR 1974 Mad 150.
21 S.B. Amcruddm v. I.T.O., 92 ITR 366.
22 P.V. Gandhi v. Gitanjati, AIR 1973 Mad 115.
23 Vinaithcethal Achi v. Chidambaram, AIR 1972 Mad 238.
24 Pamuru Vishnu Vmodh Reddy v. Chillakuru Chandrasekhara Reddy, (2003) 3 SCC 445.

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Expulsion of a partner.—-(1) 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.
(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an expelled partner as
if he were a retired partner.

Scope

Section 33 applies where the power of expulsion has been reserved in the articles of the partnership and
where the power has been exercised in good faith by all partners whose concurrence is necessary. It
does not apply to forcible expulsion of a partner from the business in violation of the contract of
partnership.25

Exercise in Good Faith

Where a notice to show cause has been duly given to the partner who is subsequently removed by a
unanimous resolution of other partners. It cannot be said that power is not exercised in good faith. 26

Power of Expulsion Conferred on One Partner

A power of expulsion of a partner may be conferred on one partner by a deed of partnership provided
such an action is taken in good faith in exercise of such power. 27 Where there are only two partners a
power of expulsion is, in effect, a power to determine the partnership although the partnership
agreement may provide for different consequences according to the occasion of its determination. In a
multi partner partnership the power of expulsion is strictly construed. 28

Insolvency of a partner.—(1) Where a partner in a firm is adjudicated an insolvent he

ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm
is hereby dissolved.
(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a
partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the
firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is
made.

Insolvency of a Partner: Net Amount of his Share in Partnership Vests in

Receiver

25 Ramnarayan v. Kashinath, AIR 1954 Pat 53.

26 Ganesh Chandra v. Gopal Chandra, AIR 1976 Cal 459.
27 Mushtaque & Co. v. C.I.T., 1973 Tax LR 26.
28 Lindely and Banks on Partnership (18th Edn., para 10-111) See Hitchman v. Crouch Butler Savage Associates Services Ltd.,
(1983) 127 SJ 441 (The Court need not apply the strict rule of construction).

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Under the Provincial Insolvency Act, 1920 what vests in the Receiver when a partner is declared
insolvent subsequent to the dissolution of partnership, is his separate property and the net amount of
his share in the partnership, after the account of partnership are made up and settled. 29

Dissolution of Partnership
If a partner is adjudged an insolvent, he ceases to be a partner in the firm on the date the order of
adjudication is made by virtue of section 34 of the Act and except where there is a contract to the
contract, such firm also dissolved under section 42(d) of the Act. 30

Date of Dissolution

There was no provision in the Indian Contract Act, nor is there any provision in the corresponding
sections of the (English) Partnership Act, 1890, on the date from which the dissolution of the firm will
take effect in the event of insolvency of a partner. But it has been held that the date of such dissolution
is the date of the commencement of the bankruptcy of the partner.31 If that English principle is followed,
m India, the date of such dissolution shall be the date on which the order of adjudication is made. But if
construction is put to sub-section (1) of section 34 dissolution of the firm may be made on that day or
any other subsequent day.

Liability of estate of deceased partner.—Where under a contract between the

partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable
for any act of the firm done after his death.
Under section 261 of the Indian Contract Act (now repealed) the date of a deceased partner is not, in
the absence of an express agreement, liable in respect of any obligation incurred by the firm after his
death. That part of estate of a deceased partner which comes to his son who is not a partner will not
ordinarily be liable in respect of any acknowledgement made by another partner after the death of his
father.32 If payments are made in liquidation of a debt after the death of a partner, the estate can take
advantage of it.33

Right of outgoing partner to carry on competing business.—(1) An

outgoing partner may carry on a business competing with that of the firm and he may advertise such
business, but, subject to contract to the contrary, he may not,—
(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(a) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

29 hixmmaraynn v. Dwarakaprasad, AIR 1964 MP 55.

30 Narsmgh Das v. Bhmram Das AIR 1961 Raj 81.
31 Harvey v. Cricket, (1816) 5 MQS 336: 17 RR 338.
32 Md. Said v. P.N.B., AIR 1937 Lah 869.
33 in the matter of Bank of Rajasthan Ltd., AIR 1962 Tripura 30.

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Agreements in restraint of trade.—(2) A partner may make an agreement with his partners that on
ceasing to be a partner he will not carry on any business similar to that of the firm within a specified
period or within a specified local limits; and, notwithstanding anything contained in section 27 of the
Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are
reasonable.

Agreement in Restraint of Trade

A, barrister-partner covenants with his co-partner, on ceasing to be partner that he will not practice for
5 years. A is restrained from setting up practice before the expiry of the term of five years. 34

Reasonableness of Restriction

The otitis to prove that the restrictions imposed in an agreement in restricted of trade are reasonable is
on the party which pleads that they are reasonable. 35

Remedy for Breach of Agreement

Where an outgoing partner enters into an agreement in restraint of trade, but subsequently commits a
breach thereto, the aggrieved party in a proper case can claim the actual damages he has suffered due
to the past breaches of the agreement and also an injunction restraining the defendant from future
breaches.36 But if the agreement contains a stipulation as to the liquidated damages for breach, the
aggrieved party cannot claim both the liquidated damages and Injunction. 37

Right of outgoing partner in certain cases to share subsequent

profits.—Where any member of a firm has died or otherwise ceased to be a partner, and the
surviving or continuing partners carry on the business of the firm with the property of the firm without
any final settlement of accounts as between them and the outgoing partner or his estate, then, in the
absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of
himself or his representatives to such share of the profits made since he ceased to be a partner as may
be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent
per annum on the amount of his share in the property of the firm:
Provided that whereby contract between the partners an option is given to surviving or continuing
partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised,
the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not
entitled to any further or other share of profits; but if any partner assuming to act in exercise of the
option does not in all material respects comply with the terms thereof, he is liable to account under the
foregoing provisions of this section.

Scope and Applicability

34 Noel Home v. John Douglas, (1912-13) 17 CWN 215 (PC).

35 Hukmi Clrnnd v. Jaipur Ice & Oil Mills, AIR 1980 Raj 155.
36 Stiles v. Ecclestone, (1903) 1 KB 544.
37 General Accident Assurance Corp. v. Noel, (1902) 1 KB 333.

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Section 37 postulates that there was no settlement of accounts, before a claim for share in profits can
be made. So, in a suit for share in profits section 37 would not take it out of limitation under Article 5 of
the Limitation Act, 1963.38

Substantive Law

Section 37 lays down the substantive law relating to the liability of a surviving partner who without a
settlement of accounts with legal representative of the deceased partner utilises the assets of the
partnership for continuing the business as his own. 39

Equitable Doctrine

The rule embodied in section 37 is only a breach of well-recognised equitable doctrine that if a trustee
mixes the trust fund with his own moneys and employs both in a trade of his own, the cestui que trust
may either claim a proportionate share of the profits or interest on the amount of the trust funds so
employed.40

Carrying on Similar Business by Surviving Partner

The right of a deceased or outgoing partner to the share of the profits mentioned in section 37 is
dependent on the surviving or continuing partner "carrying on the business of the firm with the property
of the firm". The claimant has, therefore, to establish that the business of the firm is being carried by the
partner notwithstanding the dissolution. The carrying oil of a similar business by the surviving partner
after the termination of partnership does not bring the case within the equitable doctrine enunciated by
section 377

Section 37 and Section 54

Section 37 does not come into conflict with section 54 which is entirely separate. Section 37 is intended
to meet a case where it is alleged that a continuing partner after ceasing of the partnership business and
before the settlement of final accounts utilises the assets of the partnership to his exclusive advantage.
But under section 54 there has to be a specific provision in a partnership agreement restraining a
partner from carrying on a business

Suit under Section 37

K, a Mohammedan, carried on partnership business with three other partners. On the death of K, the
business of the firm was carried on with the eldest son of K as his representative. The plaintiffs, being
the heirs of K's daughter, filed a suit for dissolution of partnership and for accounts. It was held that the
suit was not maintainable under section 37 as they did not claim as representatives of the deceased
partner. Besides, the suit having been filed after lapse of three years from the date of the death of the
partner was barred by the law of limitation.-

38 P.S. Nagaranjan v. Robert Hotz, AIR 1954 Punj 278.

39 Laxmidas v. Nanabhai, AIR 1964 SC 11.
40 Kasi v. Ramanatham Chettiar, AIR 1949 Mad 693; see Ramnarayan v. Kashinath, AIR 1951 Pat 53.

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Rights of Retiring Partner

In Pamuni Vishnu Vinodh Reddy v. Chillakurn Chandrasekham Reddy, 41 the plaintiff retired from the
partnership firm on a particular date after selling his share in the firm. It was held that once he had
retired from the partnership firm, he had no right to claim any further share in the profits of the firm.
When the defendants had not paid the value of the share of the plaintiff pursuant to the agreement for
retiring from the firm, it has become a debt on the defendants and the plaintiff is entitled to recover the
same with interest. The value of the share of die plaintiff on the date of his retirement from the firm
would be regarded as a pure debt with effect from the date on which he ceased to be a partner as per
the agreement entered into between the partner. Otherwise the result would be that he was deemed to
have been continued as partner of the firm even after he retired from the firm. If consideration is not
paid as per the agreement, he would be entitled to enforce it as per law. Mere non-payment of
consideration does not take away the legal effect of retirement from the partnership firm.

Rights and Liabilities of an Outgoing Partner

A partner retired from a partnership business due to old age and the remaining two partners were given
the right to continue the same business. It was mutually agreed that the share in the goodwill of the
retiring partner would be used to set off his liabilities to the firm. It was held that the retiring partner
was not liable to render account or to bear any loss incurred by the new partnership firm. 42

Revocation of continuing guarantee by change in firm.

A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in
the absence of agreement to the contrary, revoked as to future transactions from the date of any
change in the constitution of the firm. Where a continuing guarantee is given on the confidence of a
person of a firm, it is revoked on change of such person in the firm, because the risk of surety is altered.
Change in the constitution of a firm may occur by the death, or the retirement of a partner or by the
introduction of a new partner. Any change due to any such event puts an end to the surety's liability so
far as subsequent events are concerned. In all such cases the surety's position and risk are altered and
he has a right to say that this is not what I agreed).

41 2003 AIR SCW 1001: 2003 (2) SCALE 242.

42 K.P.A. Veilayappa Nadar v. Bhagiruthi Ammal, (1997) 1 SCC 211.

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