Chapter 20

RIGHTS, DUTIES AND LIABILITIES OF PARTNERS

A partnership comes into existence by

an agreement and such an agreement
usually provides for mutual rights and
duties and liabilities of the partners.
 Learning Objectives
Mutual Relations between Partners: rights and duties

Partners’ Relations with Third Parties; Authority of Partners

Liabilities of Partners: for acts of firm; wrongful acts of partners

Liability of the firm for misapplication by partners

Reconstitution of a Partnership Firm: Admission of a new partner;

Retirement, Death, or Insolvency of a Partner

Property of the Firm

Transfer of Partner’s Interest in the Firm

 MUTUAL RELATIONS BETWEEN PARTNERS

Subject to the provisions of this Act, the mutual rights and

duties of the partners of a firm may be determined by
contract between the partners, and such contract may be
expressed or may be implied by a course of dealing. Such
contract may be varied by the consent of all the partners,
and such consent may be expressed or may be implied by
a course of dealing. [Section 11(1)
Thus, the mutual rights and duties of partners will be
determined only by the provisions made in the
agreement, apart from the cases where the Act has
mandatory provisions that are binding on all the partners.
These are contained in Sections 9 and10 and cannot be
altered by individual agreements.
 Rights of Partners

Unless agreed otherwise, the Act confers the following rights upon the partners
of a firm:
1. Right to take part in the conduct of business Every partner has an inherent
right to take part in the conduct and management of the affairs of the business
of the firm. [Section 12 (a)]
2. Right to be consulted. Every partner has a right to be consulted and heard in all
the matters affecting the business of the firm. Any divergence arising as to
ordinary matters connected with the business may be decided by a majority of
the partners. But no change may be made in the nature of the business or
constitution of the partnership without the consent of all the partners.
[Section 12 (c)]
3. Right of access to books. Every partner, whether active or dormant, has a right
of access to all the records, books and accounts of the business and also to
inspect and copy them. [Section 12 (c)]
4. Right to share profits equally. Every partner, irrespective of the amount of
capital contribution or business expertise, is entitled to a share in the profits of
the business equally. [Section 13 (b)]
Contd.
 ….Rights of Partners

5. Right to claim interest on capital [Section 13 (c)]. Usually no interest is allowed on

the capital contributed by the partners. But where a partner is entitled so through
the partnership deed, such interest shall be payable out of profits. If there are
losses, the interest on capital will not be allowed.
6. Right to interest on advances [Section 13 (9d)]. Where a partner has made, for the
purpose of the business, any payment or advanced some amount as loan to the
firm, he will be entitled to interest at a rate agreed upon, and where no rate is
stipulated, at six per cent per annum. Interest on loan will be payable despite the
losses being suffered by the firm.
7. Right to be indemnified [Section 13 (e)] . Every partner has a right to be
indemnified by the firm in respect of payments made or liabilities incurred by him
under the following circumstances:
• in the ordinary and proper conduct of the business and
• in doing such act, in an emergency, for the purpose of protecting the firm from
loss, as would be done by a person of ordinary prudence in his own case under
similar circumstances. Contd.
 ….Rights of Partners

8. Right to use partnership property. Every partner is, as a rule, a joint owner
of the partnership property and is entitled to have held and applied
exclusively for the purposes of partnership business. [Section 15]
9. Right in emergency. A partner has the power in an emergency to do all
such acts as are reasonably necessary for protecting the firm from losses.
[Section 21]
10. Right to prevent admission of a new partner. Every partner is entitled to
prevent the admission of a new partner into the firm without his/her
consent. [Section 21]
11. Right to retire. Every partner has a right to retire by giving notice where
the partnership is at will, or with the consent of all the partners in case of a
particular partnership. [Section 32(1) (c)]
12. Right not to be expelled. Every partner has a right to continue in the
partnership and not to be expelled from it. But the power to expel may be
conferred by express agreement. In such a case the power should, however,
be exercised in good faith. [Section 33(1)]
Contd.
 ….Rights of Partners

13. Right to carry on competing business. An outgoing partner may carry on a

business competing with that of the firm and he may advertise such business. But
he cannot seek to do the following:
• using the firm’s name
• representing himself as carrying on the business of the firm, or
• Soliciting the firm’s customers. [Section 36]
14. Right to share profits subsequent to retirement Unless otherwise agreed, an
outgoing partner is entitled to share profits of the firm or claim interest at the
rate of six per cent per annum on the amount of his share in the property of the
firm if the other partners continue the business of the firm without any final
settlement of accounts with the outgoing partner. This rule is also applicable in
the case of death of a partner.
[Section 37]
15. Right to dissolve the firm A partner has the right to dissolve the partnership
with the consent of all the partners. But where the partnership is at will the firm
may be dissolved by any partner giving notice in writing to all other partners of
his intention to dissolve the firm.
[Section 40]
 Duties of Partners

The duties of partners’ inter-se may broadly be classified into two heads:
• Absolute duties, and
• Duties subject to agreement by partners
Absolute duties
These duties are mandatory in nature and are binding on all the partners. Following
are the absolute or mandatory duties of the partners:
1. Duty to carry on firm business to the greatest common advantage. Any partnership
is based on the doctrine of mutuality. Hence, each partner must act in good faith and
carry on the business of the firm for mutual benefit and not for solely personal gain.
Every partner must make the best use of his/her knowledge and skill while
conducting business so as to secure maximum benefit for the firm.
[Section 9]
A and B were partners in a firm of sugar refiners. A who had greater skill and
experience of buying sugarcane, was entrusted with the job of buying the same for
the firm. He supplied the sugarcane from his personal stock, which he had bought
earlier when the prices were low. He, however, charged the prevailing market price
and made secret profits for himself. It was held that the firm was entitled to those
profits and A must account to the firm for these private profits. A was negligent in his
duty to carry on the firm business to the greatest common advantage. Contd.
 ….Duties of Partners: Absolute duties

2. Duty to act in good faith An ideal partnership is based on mutual trust and
confidence among the partners. Every partner should act in good faith and should be
just and faithful to other partners. S/He should not deceive the co-partners by
concealment of material facts. [Section 9]
3. Duty to render true accounts . A partner is bound to keep and render true, fair, and
correct accounts of the firm to other partners. Each partner should explain all the
accounts kept by him to other co-partners and give true and correct picture of the
same. S/He should not attempt to make private and secret profits at the expense of
the firm. [Section 9]
4. Duty to provide full information. This duty is also based on the fundamental
principle of utmost good faith. As an agent of other partners, every partner is bound
to communicate full information of all things affecting the business of the firm to co-
partners. Thus, if a partner is in the possession of material facts related to the
partnership affairs, s/he should not conceal that.
[Section 9]
Contd.
 ….Duties of Partners: Absolute duties

5. Duty to indemnify for loss caused by fraud. Every partner is bound

to make good or compensate the loss suffered by the firm due to
his/her fraud in the conduct of the business of the firm. The object of
this provision is to discourage partners to deal fraudulently in the
conduct of the business. It may, however, be noted that the firm and
other innocent partners shall remain liable to third parties for the
fraud of any one of them. But they can proceed to claim damages
against the partner who has committed fraud.
[Section 10]
6. Duty not to transfer one’s rights and interests. It is the duty of
every partner not to assign or transfer his/her rights and partnership
interests to an outsider so as to make that person a partner in the
firm. [Section 29]
Contd.
….Duties of Partners: Duties subject to agreement by partners

Subject to agreement among the partners, the Act lays down the
following duties of partners Inter-se:
1. Duty to attend diligently. Every partner is obligated to attend
diligently to his/her duties in the conduct of the business of the firm.
[Section 12 (b)]
2. Duty to work without remuneration. A partner is not entitled to
receive remuneration for taking part in the conduct of the business.
[Section 13 (a)]
3. Duty to share losses. In the absence of an agreement to the
contrary, every partner is bound to contribute to the losses equally.
An agreement to share profits implies an agreement to bear the
losses as well. [Section 13 (b)]
Contd.
….Duties of Partners: Duties subject to agreement by partners

4. Duty to indemnify for wilful neglect [Section 12 (f)] A partner who is

guilty of wilful neglect in the conduct of the business and if the firm suffers
loss in consequence, is bound to indemnify (make compensation to) the firm
and other partners. However, no partner will be liable for mere error of
judgment or for the acts, resulting in loss, done in good faith without any
mala fide intention.
A and B were partners. Their business was in dissolution. A being the
managing partner, the conduct of dissolution was left to him. He was advised
by B to dispose off certain bales of cotton (property of the firm) immediately.
But A insisted that these should be disposed off at the end of the dissolution.
By that time the prices of cotton fell down. Consequently the goods realized
much less than they would have otherwise. Here the question was whether
this loss was due to ‘wilful neglect’ of A or not. The court of law held that this
was not a case of wilful neglect as A had no reason to anticipate sudden fall in
prices . Contd.
 ….Duties of Partners: Duties subject to agreement by partners

5. Duty to hold and use property of the firm exclusively for the firm Subject to contrary contract
between the partners every partner must hold and use the partnership property exclusively for
the purpose of the business of the firm.
[Section 15]
6. Duty to account for personal profits Every partner must account for, and pay back to the firm
any profits derived by him/her for himself/herself from any transaction of the firm, or from use
of the firm’s property or through business connections of the firm or firm name.
[Section 16 (a)]
7. Duty to account for profits of a competing business. Normally there is no restriction on a
partner as to carry on any competing business. But if the partners have agreed that no partner
shall do any business, which is similar to or likely to compete with the business of the firm, s/he
should not carry on such business without the consent of other partners. If s/he does that, s/he
is bound to account for and pay to the firm all profits made by him/her in that business.[Section
16 (b)]
8. Duty to act within authority. Every partner is bound to act within the scope of his/her actual or
apparent authority. If s/he exceeds that authority and other partners do not ratify it, s/he shall
compensate the co-partners for the loss suffered on account of such acts.
[Section 19(1)]
Contd.
 RELATIONS OF PARTNERS WITH THIRD
PARTIES
‘Third Party’ used in relation to a firm or a partner means any
person who is not a partner in the firm. So far we have discussed
the relations between partners inter se i.e., the rights and duties of
partners towards one another. The business of the firm of course is
conducted by its partners and during their usual course of
transactions they have to deal with third parties on behalf of the
firm. Such dealings of a partner give rise to legal relationship,
which obviously binds the firm to third parties. From the point of
view of the third parties, a partner is an agent of the firm for the
purpose of the business of the firm. Accordingly, all partners are
liable to third parties for their acts, done on behalf of the firm,
provided these are done in the ordinary course of business and in
the name of the firm. [Section 18]
 Authority of a Partner

The authority of a partner to bind the firm in the context of third

parties may be express or implied.
Express Authority . Authority is said to be express when it is given
by words, spoken or written. Thus, the authority conferred on a
partner by mutual agreement is called an express authority. The
firm is bound by all acts of a partner done within the scope of his
express authority notwithstanding that the acts are beyond the
scope of the partnership business.
Implied Authority . Also known as ostensible or apparent
authority, implied authority is derived from either usage of trade,
conduct of parties, or statute. It arises by implication of law and is
not conferred by express agreement among the partners.
 Doctrine and Scope of Implied Authority
Subject to the provisions of Section 22, the act of a partner which is done to carry on, in
the usual way, business of the kind carried on by the firm, binds the firm.’ Whereas
Section 22 reads, ‘In order to bind a firm, an act or instrument done or executed in the
firm name, or on any other manner expressing or implying an intention to bind the firm.
[Section 19]
Accordingly, for an act to be deemed as one with implied authority it is necessary that:
• The act done by the partners must relate to the normal business of the firm [Example 1]
• The act must have been done in the usual way of carrying on the firm’s business
[Example 2]
• The act must be done in the name of the firm and in some manner indicating an
intention to bind the firm.
Example 1. A and B are in a partnership business of exporting footwears. B who is the
managing partner places an order for a huge quantity of cotton bales in the name of the
firm. As this act does not relate to the normal business of the firm, it will not fall within
the scope of implied authority. The firm, therefore, will not be liable for it.
Contd.
 ……Doctrine and Scope of Implied Authority

Example 2. A, B, and C are in partnership. Their firm deals in

readymade garments. X a retailer purchased goods worth Rs 1000 on
credit. Later on, A collected the amount due from X on behalf of the
firm and utilized the sum for his personal use. B and C are not aware of
this receipt. Here the firm cannot claim the amount from X on the plea
that A had no authority to collect the amount. Collecting and receiving
money from debtors is an act done in the usual course of business.
Example 3 . X and Y are partners in a building construction business. A
goes to a raw material supplier and purchases on credit certain
quantity of cement in the firm’s name. He utilizes this cement to
construct his own house. This act will bind the firm because such kind
of act is usually done in the construction business and is done in firm’s
name.
 Acts within the implied authority of a partner

Subject to the limitations mentioned above, every partner has an implied

authority to bind the firm by the following acts i.e., the implied authority of a
partner shall normally include:
1. Selling firm’s goods;
2. Buying, on behalf of the firm, goods in which the firm deals or which are used
in the firm’s business;
3. Receiving payments of the debts due to the firm and giving valid receipts for
them;
4. Engaging and discharging employees;
5. Pledging movable property or goods of the firm as security for the purpose of
getting loans;
6. Drawing, accepting and endorsing negotiable instruments in the name of the
firm;
7. Employing solicitor or attorney on behalf of the firm to defend action against it
(Bank of Australia vs Beriliat ) [Section 20]
 Acts outside the implied authority of a partner
[Section 19 (2)].

According to Section 19 (2), which has restricted the scope of implied

authority of a partner, in the absence of any usage or custom of trade to
the contrary, the implied authority of a partner does not empower
him/her to do the following:
1. Submit a dispute relating to the business of the firm to arbitration;
2. Open a bank account on behalf of the firm in his own name;
3. Compromise or relinquish any claim or portion of a claim by the firm;
4. Withdraw a suit or proceeding filed on behalf of the firm;
5. Admit any liability in a suit or proceeding against the firm;
6. Acquire immovable property on behalf of the firm;
7. Transfer immovable property belonging to the firm; or
8. Enter into partnership on behalf of the firm.
However, the partners by mutual agreement can extend or limit the
implied authority of any partner
 Partners’ Authority in an Emergency [Section 21]
A partner in an emergency and prescribes that ‘a partner has authority, in an
emergency, to do all such acts for the purpose of protecting the firm from loss as
would be done by a person of ordinary prudence, in his own case, acting under
similar circumstances, and such acts bind the firm.
[Section
21]
Thus, to enforce a partner’s authority in an emergency the following three
requirements must be fulfilled:
1. there should be an emergency, i.e., a situation which requires urgent action;
2. the act should be done to protect the firm from loss or damage likely to be
caused by such emergency; and
3. the nature of act should be such as would have been undertaken by a prudent
person in his/her own case under similar circumstances.
Ram and Shyam are in partnership business of cement. They have decided by an
express agreement that no partner would have the authority to sell the goods of
the firm by allowing a cash discount of more than 10 per cent without consulting
the co-partner. Owing to sudden slump, the prices crashed. Ram, in order to save
the firm from loss, sold all the stock of cement at 20 per cent discount without
consulting his counterpart, Shyam. The firm is bound by such act of Ram.
 LIABILITIES OF PARTNERS

The liability of partners may be classified as follows:

• Liability of partners for acts of the firm
• Liability of the firm for wrongful acts of a partner
• Liability of the firm for misapplication by partners
Liability for Acts of the Firm [Section 25]
Every partner is liable, jointly with all the partners and individually , for all
acts of the firm done while s/he was a partner. This is known as liability of
partners for the acts of the firm. Further, the liability of all the partners is
unlimited. By virtue of joint and several or separate liabilities for every act
of the firm, the third party can sue each partner individually and also jointly
with other partners. Moreover, the act must have been undertaken in the
ordinary course of the business of the firm.
[Section 19 (1) and 22]
Contd.
 …..Liability of the Firm for Wrongful Acts of a Partner.
Where a partner, in the ordinary course of business, commits a wrongful
act and some loss or injury is caused to any third party, the firm is liable
for such an act. The wrongful act may be tort, fraud or negligence. Section
10, however, provides protection to the firm in this regard stating that,
‘every partner shall indemnify the firm for any loss caused to it by his
fraud in the conduct of the business of the firm.’ Thus, such loss will be
borne ultimately by the partner committing the fraud and cannot be
shared amongst all the partners. But in case loss is caused to third party
by tort (i.e., breach of duty) or due to negligence on the part of any
partner, all the partners shall be liable thereto.
[Section 26]
X, Y and Z are partners. The business of the firm is to publish magazines. X,
who is the editor of the magazine, allows the publication of a defamatory
article about an eminent person K, without confirming its validity. K in turn
sues the firm. The firm will be liable for this act of the editor partner as it
was committed in the ordinary course of business. Contd.
 …..Liability of the Firm by Misapplication by Partners

Where a partner acting within the scope of his apparent authority receives money

or property from a third party and misapplies it, or a firm in the course of its

business receives money or property from a third party, and that money or

property is misapplied by any of the partners while it is in the custody of the firm,

the partner or the firm, as the case may be, is liable to make good the loss.

[Section 27]

A, B and C are partners in a business of financing real estate. X, a client of the firm

repays his loans of Rs 50,000 to A who does not intimate his co-partners about the

recovery of the loan and misuses the money. In this case X would be discharged of

the debts on account of payment made to A. It is up to the firm whether it

initiates any suit against A to recover the amount held by him.

 RECONSTITUTION OF PARTNERSHIP FIRM

Any change in the composition or relations of partners

has the effect of ‘reconstitution of the partnership firm’.
Reconstitution takes place in the following
circumstances:
1. A new partner is admitted
2. A partner retires
3. A partner is expelled
4. A partner is declared insolvent
5. A partner dies
6. A partner transfers his share in the firm to another
person. Contd.
 Admission of a New Partner or Incoming Partner
Subject to the contract between the partners and to the provisions of
Section 31, ‘no person shall be introduced as a partner into a firm
without the consent of all the existing partners’ [Section 31 (1)]. Thus,
a person cannot be admitted as a partner in an existing firm without
the consent of all the partners. This because mutual trust and
confidence among the partners being an essential ingredient of an
ideal partnership, only such persons can be admitted in whom all the
existing partners place their trust and confidence. This rule is,
however, subject to any provision to the contrary in the partnership
agreement. For instance, the partnership agreement between A and B
provides that either partner could introduce into partnership any one
of their sons on attaining the age of 18 years. In such a situation there
is no need for the consent of B if A decides to admit his son (who has
attained majority) as a partner.
 Liability of an Incoming Partner

. Subject to the provisions of Section 30, a person who is introduced as a partner into a firm
does not thereby become liable for any act of the firm done before he became a partner.
[Section 31 (2)]
The above provision indicates that the liability of an incoming partner is limited only to
those acts of the firm, which are committed after his/her becoming a partner. Thus, the
liability of a new partner commences from the date of his/her admission. However, this
general rule has two exceptions, which are as follows:
By mutual agreement, s/he may undertake to share the liabilities existing prior to his
admission. But such an agreement is binding only among partners, and does not entitle the
creditors to proceed against the new partner for the recovery of old debts for the ‘absence
of privity of contract’. In order to make the new partner liable to creditor for past debts the
following two conditions should be satisfied:
– The new partner or the reconstituted firm has assumed the liabilities for the past debts expressly or
impliedly, and
– The creditors have accepted the new firm as their debtor.
Where a minor partner elects to become a full fledged one on attaining majority, s/he shall
be personally liable to third parties for all acts of the firm done since s/he was admitted to
the benefits of the firm.
• Outgoing Partner
An outgoing partner is one who discontinues being a
partner in the firm. Normally a person discontinues or
ceases to be a partner in a firm in any of the five
following ways.
• When he retires
• When he is expelled
• When he is adjudicated as insolvent
• When he dies, and
• When he transfers his interest in the firm
• Retirement of a partner [Section 32]
• According to Section 32 (1), a partner may retire from the firm:
• With the consent of all the other partners;
• In accordance with an express agreement by the partners; or
• Where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.
• Liability of a retiring partner A retiring partner remains liable for all the acts of the firm have been done while
s/he was a partner or acts pending at the time of his retirement. But as per Section 32 (2), a retiring partner
may be discharged from any liability to any third party for acts of the firm done before his retirement by
novation i.e., by an agreement made by him with such third party and the partners of the reconstituted firm.
Such an agreement may be express or implied. He may also continue to be liable after retirement if he allows
himself to be held out as a partner, e.g., by allowing his name to remain the firm name. Section 32 (3)
specially provides that ‘until public notice of the retirement of a partner is given, the retiring partner and
other 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 his retirement.’
• Thus, in order to protect himself/heself from the above stated liability, a retiring partner should give express
notice of his retirement to persons who were dealing with the firm before his retirement or give public notice
in the manner as laid down in Section 72 of the Act. This entails publishing the public notice of his retirement
in the Official Gazette, and in at least one local newspaper circulating in the district where the firm carries on
its business. However, a partner who has retired is not liable even if no public notice of his/her retirement has
been given, although creditors were informed individually [Jain Nautamal Wadhawan vs Shri Vivekanand
Cooperative Housing Society].
• Expulsion of a Partner [Section 33]
• Expulsion of a partner means removal or dismissal of a partner from the partnership of the
firm. In the normal course a partner cannot be expelled from the firm. As per Section 33 (1),
‘a partner may not be expelled from a firm by any majority of the partners, save in the
exercise in good faith of power conferred by contract between the partners.’
• It means that a partner can be expelled from the firm only when the following three
conditions are satisfied:
• The power to expel a partner is available to firm i.e., partners by an express agreement
between them;
• The power of expulsion has been exercised by a majority of partners; and
• The power has been exercised in good faith and for the benefit of the firm.
• A partner who is otherwise expelled is entitled to be re-instated in the partnership. However,
s/he is not entitled to damages for improper expulsion unless the expulsion was mala fide.
• The partner who is being expelled must be given reasonable notice and opportunity to
defend his/her position and to remove the cause of his/her expulsion [Nemi Dass vs Kunj
Behari]. A partner who is expelled from the firm is subject to the same rights and liabilities
for acts done before or after his expulsion as those of a retired partner.
• Insolvency of a Partner [Section 34]
• A person also ceases to be a partner if a court of competent jurisdiction declares him insolvent.
Section 34 (1) provides that, ‘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 thereby
dissolved.’ Thus, if a partner is declared insolvent, s/he thereby ceases to be a partner in the firm
from the date on which the order of adjudication is made. It is not necessary that the firm be
dissolved when a partner is declared insolvent.
• 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 [Section 34 (2)]. That is if a firm is not dissolved, the estate of a partner, who
becomes insolvent, is not liable for partnership debts contracted after the date of insolvency. It will,
however, be liable for debts incurred before insolvency. In similar way, the firm is not liable for any
act of the insolvent, done after the date on which the order of adjudication is passed. Nevertheless,
the insolvent partner’s share in the firm’s assets may, of course, be utilized for firm’s debts.
• Furthermore, unlike a retiring partner, an insolvent partner is not required to give a public notice of
his being adjudicated insolvent in order to terminate his liability for future acts of the firm. The
adjudication of insolvency of an individual is by itself a public notice.
• Order of Adjudication refers to judicial order declaring a person insolvent.
 Death of a Partner
Normally the death of a partner results in the dissolution of the firm. If the partners agree that the death of any one of
them will not have the effect of dissolution of the partnership as regards the surviving partners, the firm may not be
dissolved unless it consists of only two partners (Commissioner of Income-tax vs G.S. Mill ). As per Section 35, 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/her death. It thus, implies that the estate of a deceased partner will be liable
only for the debts incurred before his/her death.
No public notice is needed in respect of a deceased partner to discharge his/her estate from liability for future acts of the
firm. Death is a notice by itself. In Bagel vs Wilter , X who was a partner in X & Co. placed an order with the supplier of the
firm to supply goods in his lifetime. But when the goods were delivered, X was no more. It was held that the estate of X (the
deceased partner) was not liable for the debt. This is because there was no debt due in respect of the goods in X’s lifetime.
Transfer of partner’s interest in the firm [Section 29]. A partner can transfer his interest in the firm in full or partially to
third party with or without any consideration. In certain cases the transfer of a partner’s interest in the firm may take place
due to operation of law. For example, in the event of death of a partner, his interest in the firm may pass on to his/her legal
heirs. But such persons (the transferee) are not treated as partners. Section 29 clearly states that ‘a transfer by a partner of
his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest, does not
entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business, or to require
accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the
transferring partner, and the transferee shall accept the account of profits agreed to by partners.’ The Supreme Court has
also held that the assignee will enjoy only the rights to receive the share of the profits of the assignor and account of profits
agreed to by other partners (Narayanappa vs Krishanappa) . Thus, the transferee can neither participate in the conduct of
the business of the reconstituted firm nor inspect the books of account. S/He can simply claim the transferring partner’s
share in the profits of the firm.
• If the firm is dissolved or if the transferring partner ceases to be partner, the transferee will be entitled as against the
remaining partners to receive the share of the assets of the firm to which the transferring partner is entitled and for the
purpose of ascertaining that share, he can ask for an account as from the date of the dissolution [Section 29 (2)].
• It must, however, be noted that as a matter of fact, no partner can transfer his partnership interest with the intention of
making the transferee a partner in the firm without the consent of all the other partners.
 Rights of an Outgoing Partner

The rights of an outgoing partner include the following:

1. Right to carry on competing business An outgoing may carry on a
business competing with that of the firm, and he may advertise such
business, but, subject to the contract of the contrary, he may not:
• Use the firm’s name;
• Represent himself as carrying on the business of the firm; or
• Solicit the customers of persons who were dealing with the firm before he
ceased to be a partner [Section 36 (1)].
Further, if the partners think that the above statutory restrictions are not
sufficient to protect the interest of the firm, then as per Section 36 they
may enter into an agreement that on ceasing to be a partner, any partner
shall not carry on any business similar to that of the firm for a specified
period or within a specified local limit. Such an agreement shall be valid if
the restrictions imposed are reasonable.
Contd.
 ….Rights of an Outgoing Partner

2. Right to share subsequent profits in certain cases. 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/her estate is entitled at the option of
himself/herself or their representatives to such share of the profits made since
s/he ceased to be a partner as may be attributable to the use of his/her share of
the property of the firm or to interest at the rate of six per cent per annum on
the amount of his/her share in the property of the firm.

[Section 37]
3. 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.
[Section 38]
 PROPERTY OF THE FIRM

Subject to contract between the partners, the property of the

firm includes all property and rights and interests in property
originally brought into the stock of the firm, or acquired by
purchase or otherwise by or for the firm, or for the purposes and
in the course of business of the firm, and includes also the
goodwill of the business. Where a partner, who does not
contribute in cash towards the capital of the firm, instead brings
in immoveable property as his share of capital, the same becomes
the property of the firm. Here it is immaterial whether a formal
document of transfer bas been executed in the name of the firm.
Similarly, property acquired with money belonging to the firm is
deemed to be the property of the firm, regardless of the fact that
the partner has acquired that property in his own name, unless a
contrary intention appears from his conduct. [SECTION 14]