Introduction

Understanding partnership act within the Indian Legal framework of the Indian Partnership Act, 1932 involves a dynamic understanding of legal considerations. One crucial aspect is the transition between incoming and outgoing partners, which can significantly impact the structure and operations of a partnership. Understanding the legal provisions governing these transitions is essential for both existing and prospective partners.

Section 31. Introduction of a partner :

1. Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.

2. 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.

The words without the consent of all the existing partners indicate that the introduction of a new partner is based upon the consent of the existing partners. This requirement is, however, subject to the contract between between the partners. So we can say that, if the agreement provides that, a senior or any partner shall have a right to introduce a new partner at any time, then the contract will be binding on all of the partners.

Commissioner of I.T., M.P v. Seth Govind Sagar Mills :

In the case of partnership consisting of only two partners, if one partner dies, the partnership would dissolve under section 42(c).

No heir of the deceased partner can become a partner with the surviving partner except with the latter’s consent, express or implied.

Russa Engineering Works v. Kanara Transport Co. :

In order to render an incoming partner liable to the creditors of the old firm, there must be by some agreement, express  or tacit, to that effect between him and the creditors.

An incoming partner becomes liable for an existing debt where the following two conditions are fulfilled :

1. Where the new firm constituted by his introduction has agreed to take over the liability of the old firm, and,
   1. Where the creditor has agreed to discharge the old firm, and to accept the new firm as his debtors.

Section 32. Retirement of a partner

1. A partner may retire-
2. with the consent of all the other partners,
3. in accordance with an express agreement by the partners, or
4. where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.
5. 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.
6. 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 partner or by any partner of the reconstituted firm.

The word ‘retire’ is confined to cases where a partner withdraws from a firm and the remaining partners continue to carry on the business of the firm without dissolution of partnership between them (Vishnu Chandra v. Chandvika Prasad). It does not cover the case of a partner who withdraws from a firm by dissolving it. This would be a dissolution and not retirement.

Illustration :

A, B, & C are partners………………..D is their creditor.

A retires, and a new partner X is introduced in the firm.

X agrees to take over the liability of A.

D, the creditor, agrees with A and the reconstituted firm of B, C and X that he will look only to the new firm for the payments of his debt.

A, the retiring partner, is discharged from liability to D.

Unless, therefore, there is novation a partner who retires does not thereby cease to be liable for the firm’s liabilities incurred before his retirement.

Public notice : (Sec 72 prescribes the mode of giving public notice)

The liability of a retiring partner to the third party will continue even after retirement until public notice is given of the retirement. (Sri Gaur Karuna Dey and Ors. V. Sri Nemi Dey and Ors.)

If no public notice is issued, the retiring partner cannot escape from his liability. Public notice may be given either by the retired partner or by any partner of the reconstituted firm.

Sleeping partner : The term ‘sleeping partner’ or dormant partner’ are not mentioned in the Act. But generally, he is a partner who does not take active part in day to day conduct of the business, so he being in the partnership he is always liable for the debts of partnership whether third party knows of his being partner or not.

Illustration :

A, B & C are partners. C is a sleeping partner, who has not been known by creditors to be a partner of A & B. C retires without giving public notice of his retirement. C is not liable for subsequent debts incurred by A and B.

Heath v. Sanson : “A dormant partner may retire from a firm without giving notice to the world.”

Proviso of sub-section 3 says that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

Section 33. 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.

Power to expel a partner may be conferred by express agreement. Reasonable warning and opportunity of explanation must be given

An irregular expulsion being wholly inoperative, the person against whom it is directed does not cease to be a partner; he may claim reinstatement in his rights (Blisset v. Daniel)

The liability of the firm and of the expelled partner after expulsion is on the same footing as the liability of a firm and a retired partner after retirement.

Section 34. 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 thereby 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.

The consequences resulting from the insolvency (Effects of insolvency) of a partner are :

1. The partner adjudicated an insolvent ceases to be a partner (S 32)
2. He ceases to be a partner on the date on which the order of adjudication is made. (S 32).
3. The firm is dissolved on the date of the order of adjudication, unless there is a contract to the contrary. (S 42(d)).
4. A firm is dissolved, by the adjudication of all the partners or of all the partners but one as insolvent. (S 41(a)).
5. The firm is in no case bound by the acts of a partner who has been adjudicated insolvent. (proviso-S 47).
6. The estate of a partner adjudicated is not liable for any act of the firm (S 34).

Section 35. 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.

It is immaterial if the obligation was incurred towards creditor who believed the deceased partner to be living and a member of the firm (Neel Comul Mookerjee v. Bipro Dass).

If goods are ordered before, but not delivered till after the death of a partner, a suit for goods sold and delivered will not lie against the representative of the deceased partner (Bagel v. Miller).

But this section does not override the express provisions of section 47 by which mutual rights and duties of the partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of firm and to complete transactiom begun but not finished at the time of dissolution  (Administrator General of Madras v. Official Assignee).

Section 36. 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-
2. use the firm name,
3. represent himself as carrying on the business of the firm, or
4. solicit the custom of persons who were dealing with the firm before he ceased to be a partner.
5. Agreements in restraint of trade :- 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, such agreement shall be valid if the restrictions imposed are reasonable.

Outgoing partner : A retired partner (sec 32),an expelled partner(sec 33), and a partner who has ceased to be a partner by virtue of an order of adjudication(sec 34), falls within the meaning of an outgoing partner.

Sub-section 1, while recognising the right of an outgoing partner to carry on a business, competing with that of the firm, and even to advertise such business, imposes certain restrictions on his activities in order to prevent unfair competition with the firm.

Section 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 of 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 where by 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.

Mansha Ram v. Tej Bhan : The outgoing partner is entitled to elect between profits and interest after his share had been ascertained.

Section 38. 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.

Illustration : A becomes surety to the firm of “N.C. Mookerji” for B’s conduct as cashier to the firm. The Constitution of the firm of the firm is subsequently changed, and its name is altered to “N. Mookerji & Son.” A is not liable for B’s defalcations subsequent to the change.

(Based on Neel Comul Mookerjee v. Bipro dass)