Partners in Partnership Firm

Indian Partnership Act 1932 Partners in Partnership  Firm

In this Part, we discuss about following topics about Partners of a Partnership Firm

Mutual Relationship Rights of Partners Duties of Partner Liabilities of  Firm   Authority of  Partner

Acts of Partners Reconstitution of Firm Admission of New Partner Retirement of Partner Transfer of Partner’s interest

Mutual relations of Partners, Partners’ Mutual relations

Partnership Act 1932 – Duties of partner, Partnership Act 1932- Rights of Partners, Implied authority of Partner, authority of Partner, Types of Partners, Partners of Firm, Partners of Partnership Firm, Rights of Partner, Partner’s Mutual Relations,

Absolute Duties of partner, Partner’s authority in Partnership Firm,

Implied Authority and Limitations of Partner in Partnership Act 1932, Implied Authority of Partner, Limitations of Implied Authority Partner,

Reconstitution of Firms,

aknadhani, Sikshayati,

Retirement of Partner in Partnership Firm, Retired Partner in Partnership Firm,

Partnership Act 1932- Rights and Liabilities of Retired Partners, Rights of Retired Partners,

Title and tags edited on 29.5.19

1 Mutual Relation of Partners

Indian Partnership Act 1932 Mutual relations of Partners

Every Partner is an Agent of other Partners for all business related matters.

The relationship of partnership comes into existence by an agreement between the partners.  The mutual rights and duties of the partners are governed by their own contracts, expressly or impliedly, from the course of dealing among them. Such relationship can vary with the consent of all partners, expressed or implied by a course of dealing [s.11(1)].

Principles of Mutual Relations of Partners

The law of partnership is based on the principle that partners should have the freedom to arrange their own affairs amongst themselves (s.11). The mutual relation amongst the partners is a matter of internal management of affairs of the firm. The Act has given full freedom to the partners to specify their respective rights and liabilities which can be varied only with the consent of all other partners.

For example, the agreement between partners may provide:                

• one partner shall provide the capital, and the other partner shall do all the work; or
  • one partner shall be authorised to draw and negotiate negotiable instruments on behalf of the firm.

However, the agreement regulating the mutual relations of partners shall affect the partners only, and shall not bind the third parties.

Principle of absolute good faith

The principle of absolute good faith is fundamental for efficient conduct of the business. Every partner must be faithful and sincere to the other partners and carry on business on behalf of the firm in most beneficial manner to the firm (s.9). This principle cannot be excluded or modified even with the consent of all the partners.

2 Rights of Partners in Partnership Firm

Indian Partnership Act 1932 Rights of Partners in Partnership Firm

Contract between the partners, either expressed in writing, or implied by course of dealings, shall determine the mutual rights of the partners.

1. Conduct of Business : Generally, partnership is the common business of all the partners. Every partner has a right to take part in the conduct of the business [s.12(a)].
2. Exclusion of Right :  The agreement between the partners may provide for the exclusion of such right in case of some partners.
3. Defaulting Partner : If a partner neglects or refuses to perform his duties and the burden of performing such duties falls on other partners, the defaulting partner has to compensate the other partners.

Right to be consulted : Every partner has a right to be consulted in all business related matters of the firm. In exercising the powers, the partners shall act in good faith.

Right of Expression : Every Partner has right to express his opinion before the matter to be decided.

• Resolution by Majority : In absence of specific provision in the Contract, the following rules apply for resolution of differences in deciding business matters
• Ordinary Matters : If any difference of opinion arises amongst the partners on an ordinary matter, it shall be resolved by a majority of partners.
• Fundamental Matter : But, if the difference of opinion arises on a fundamental matter, it shall be resolved with the unanimous consent of all the partners.
• Equally Divided : If the partners are equally divided those who prevent the change, there will be no change regarding the Important matters of business, without the consent of all the partners [s.12(c)].

However, the agreement between the partners may provide that in all matters, majority decision shall prevail.

• Books & Documents : The partners have rights of inspection of Books of Accounts and related information
• Place of maintenance of Accounts : The books of account of the firm are to be kept at the principal place of business.
• Information & Inspection : Every partner, or a duly authorised agent of each partner, has the right to obtain full information regarding the affairs of the partnership including all acts, transactions & dealings relating to the partnership funds and partnership property; examine the books and accounts of the firm and obtain a copy of such books and accounts [s.12(d)].
• Minor Partner : A minor partner can also access to and inspect any of the accounts of the firm, but not books [s.30(2)].

Exclusion of Rights : However, the agreement between the partners may provide for the exclusion of such rights in respect of some partners.  

• Share profits : Every partner has right to share profit of the business
• Share in Profit :  In absence of specific agreement between the partners, all the partners are entitled to share the profits, and also liable to bear the losses of the firm, equally [s.13(b)].
• Specific Agreement : However, the agreement between the partners may provide otherwise.
• Interest on Advances : A partner is entitled to claim interest on any payment or advance made for the purposes of business of the firm beyond the amount of capital.
• Rate of Interest : The interest shall be payable at the rate of 6% per annum or at the specified rate agreed in the agreement [s.13(d)]
• Profit :  The Interest is to be paid irrespective of the fact that whether or not the firm makes a profit or not.
• Source : Such interest can be paid out of the profits as well as out of the assets of the firm.

5. Interest on Capital : Normally, Interest may be paid on Capital, out of Profits only.

• Rate of Interest : The agreement may provide for payment of Interest on Capital,  and the applicable  Rate of  Interest, only out of profits [s.13(c)].
• Specific Agreement : However, the agreement may provide that interest on capital shall be paid whether or not the firm earns a profit.

6. Indemnification :  A Partner has a right to be indemnified by the firm in respect of payments made and liabilities incurred by him [s.13(e)].

A Partner is indemnified when he has acted as a man of ordinary prudence in his own case acting under similar circumstances for the purpose of protecting the firm from loss, in the ordinary and proper conduct of the business. Such acts of the partner bind the firm (s.21).

7. Use Partnership Property : Every partner has a right to use the partnership property only for the purpose of business of the firm.

• Personal Use of Partnership Property : No partner can treat Firms property as his personal property (s.15).
  • Restoration of Benefit:  If a partner uses the property of the firm, directly or indirectly, for his personal benefit he must account to the firm for the profits, which he may have earned.
  • Specific Agreement : However, a partner may use the partnership property for his personal purposes also, if the agreement between the partners so provides.

8.  Admission of a New Partner : The agreement may provide for admission of new partners.

• Unanimous Consent : All the partners must given their consent to admission of the new Partner
• Specific Provision : The contract may contain express provision permitting admission of a Partner [s.31(1)].
• Pre Defined Criterion : If the agreement between the partners does not recognise a person as a partner on his admission on the basis of some predefined criterion and consent of other partners, the new partner can be admitted without such consent.

9. Retirement from the firm : A Partner has a right to retire. He may retire as per provision in the agreement.

• Voluntary Retirement: A Partner may give a written notice of his intention to retire to all the partners, if the partnership is at Will, and may retire with the consent of all Partners
• Retirement as per Agreement : A partner may retire in accordance with an express agreement entered into between the partners for a particular partnership [s.32(1)].  

10 Expulsion from  Partnership : Every partner has a right not to be expelled until his retirement or death.

Power to Expell a Partner : However, a partner may be expelled as per specific power to expel a partner is contained in the agreement between the partners. Such Power must be exercised by a majority of partners, acting to good faith [s. 33(1)].

11. Remuneration : Partner is normally not entitled to receive any salary or remuneration for taking part in the conduct of the business.

Specific Agreement : The Agreement between the partners may expressly provide for payment of remuneration to specific working partners.

12. Right to carry on competing business : An outgoing partner has a right to carry on a competing business of the firm.

• Advertise such Business : He has the right to advertise his business
• No use of Firm Name : However, he cannot use the firm’s name, can not represent himself as partner of the firm.
• Customer of Firm : He cannot solicit the customers who were dealing with the firm before he ceased to be a partner (s.36).

13. Receive subsequent profits : On non settlement of account ofretiring partner, he has a right to receive remuneration or Interest.

Unless anything specifically provided in the contract, in case of non-settlement of partners account after retirement, the following rules apply :

• Non Settlement of Accounts : After retirement of a Partner, if the firm continues to carry on business, without final settlement of account of the outgoing partner, the outgoing partner (or legal representative of the deceased partner) has a right to receive remuneration
• Amount of Remuneration : He  is entitled to receive remuneration of higher of the following two amounts:
• Interest at the rate of 6% per annum on the money remaining unpaid.
• Such proportion of profits as have been earned by the firm by use of money remaining unpaid to the retiring partner (s.37).

14 Agent of the firm : Every partner is the agent of the firm for the purposes of business.

• Act as Agent : A Partner has right to act  on behalf of the firm (s.18)
• Binding on Firm : Act of a partner binds the firm (s.19).

15 Post-expiry term: If a firm continues to work even after the expiry of its term, the rights of the partners will continue to remain same as before [s.17(a)].

16  Additional undertakings : For additional undertakings, rights of the firm will remain same with that of original undertakings [s.17(c)].

3 General Duties of Partner

Indian Partnership Act 1932 General Duties  of Partners

A Partner has to perform various duties of the Firm. Normally such duties are specified in the agreement.

In absence of any specific agreement between the Partners, the following rules apply in relation to General Duties of Partners. However, these Duties may be modified by mutual agreement between the Partners.

General Duties may be classified as follows:

• Share Losses: Generally an agreement to share profits implies an agreement to share losses also. [s.13(b)]. However, the agreement between the partners may provide that some partner shall not be liable to share the losses (he shall be a partner in profits only).  
• Not to make personal profits : The partners are duty bound to carry on the firm’s business to greatest common advantage without making personal profits.

If a partner derives any personal profit from any transaction of the firm, or from the use of the property or business connection of the firm or name of the firm, he shall be liable for that profit and pay it to the firm. [s.16(a)]

However, such duty may be excluded by an agreement between the partners [s.16(b)].

• Ex. A and B are partners in a business which consists of supplying cloth to the government. Subsequently, it is found out that A is engaged with C in the supplying of cloth to the same government. A is bound to account to the firm for the profits so made by him.
• Ex.: XYZ & company is a partnership firm consisting of three partners X, Y and Z, and carrying on the business of trading in furniture. The company entrusts Y with the responsibility of purchasing furniture on behalf of the firm. Y supplies the furniture from his own stock making considerable profit, but does not disclose this fact to other partners, X and Z. In this case, Y is guilty of bad faith, and so he is liable to account for the profit made by him to the firm.
• Not to profit in competing business : A partner must not carry on any business of the same nature to compete with that of the firm. If one of the partners carries on rival business to compete with and to the prejudice of the firm, the other partners are entitled to the following rights:
• They can restrain that partner by an injunction order from the Court,
• Other partners may sue him to account for the profits made by him in the rival business.
• Not to carry any other business : The partner shall not carry on any business other than the business of the firm (whether same or different) until he continues to be a partner in the firm. Such restriction do not amount to restraint of trade under s. 27 of the Indian Contract Act, 1872. Such restraint is legally enforceable.
• Indemnify the firm for loss due to willful neglect : A Partner has to indemnify the firm for any loss caused to the firm by his willful neglect. [s.13(f)]. The firm becomes liable to the third party for such willful neglect or fraud of any partners.
• Proper use of property of the firm : The partnership property must be used exclusively for the business of the firm (s.15). If any partner makes personal profits by using the partnership property, he is liable to account for the profit made by him. Moreover, if any damage is incurred to the partnership property, he has to compensate the firm for such loss.
• Not to claim remuneration : A Partner is not entitled to receive any remuneration for taking part in the conduct of the business of the firm [s.13(a)]. However, some remuneration can be provided to the working partners, if there is a specific agreement.
• Pardanashin woman Partner : Where a pardanashin woman is a partner, it is just and equitable that some allowance should be given to the other partners for bearing extra trouble in carrying out the business of the firm.
• Additional Efforts : Where extra trouble is imposed to a partner due to wilful neglect of duty of another partner, such Partner is entitled to be compensated.
• Reconstituted Firm : In a reconstituted firm (Firm in which partners have changed due to new induction or retirement), a partner has the same duties as he was having prior to the reconstitution of the firm. [s.17(a)]
• Fixed Term Partnership : If a firm is set up for a fixed term (Fixed Term Partnership) and continues even after the expiry of the term, the duties of Partners will remain same as before the expiry of the term. [s.17(b)]
• Pre-Joining Period : A newly admitted partner is not liable for any act of the firm done before he became a partner [s.31(2)].
• Additional Undertakings : Where a firm takes over some additional undertakings, the duties of partners will be same as in respect of the original undertaking. [s.17(c)]

4 Absolute Duties of Partners

Indian Partnership Act 1932 Absolute Duties of Partners

Absolute Duties are mandatory and specified by Partnership Act 1932. These duties cannot be excluded by an agreement to the contrary. Every Partner must perform these duties even if the agreement entered into between the partners, exempts any partner from performance of these duties.

• Act in Good Faith : Every partner is duty bound to act in good faith and he must be just and faithful. No partner should deceive any other partner. Every partner must act diligently and sincerely in the conduct of business. Thus, utmost good faith is required between the partners inter se.

Ex. A secret agreement between two partners causing an injury to the other partners amounts to a breach of duty imposed upon the partners. As the partners have to be just and faithful to each other, the agreement becomes unlawful, and consequently void.

• Carry on business to the greatest common advantage : Every partner must conduct the business of the firm in such a manner which is most beneficial to the firm.

Every partner is bound to carry on the business of the firm to the greatest common advantage. No partner should make any profit at the expense of the firm.

Ex. A and B were partners in a business relating to jute. B was authorized to buy jute for the firm. B, without A’s knowledge, supplied to the firm his own jute at the market price. He had bought the jute at a lower price and thus made a considerable profit. Held, he must account to the firm for the profit made.

• Render true accounts : Every partner should keep proper accounts of all money transactions relating to the business of the Partnership (s.9). The partners should render true accounts and full information of all the transactions affecting the firm to the other partners. They should also explain all the accounts to the other partners.

If a partner mixes up his private affairs with those of the partnership, his personal expenses would be  disallowed.

• Give full information : Every partner must give full information to the other partners regarding the affairs of the firm, without concealing the facts. (s.9)

If a partner is in possession of some material facts relating to certain partnership assets, but he does not disclose those facts to the other partners, and purchases other partners share in partnership, it amounts to a breach of duty of good faith. Such transaction is voidable at the option of the partners from whom the material facts were concealed.

• Indemnification for loss caused by fraud : If any fraud is committed by a partner in the conduct of business of the firm, he shall be liable to indemnify the firm for loss caused to it (s.10).

If an innocent partner becomes liable to third parties due to the committed fraud of other partner, he can claim damages from the defaulting partner.

• Duty to act within authority : Every partner is duty bound to act within the scope of his authority, expressed and implied [s.19(1)].

If he exceeds the authority conferred on him and the firm suffers a loss, he is liable to compensate the firm suffering from such loss.

• Duty to be liable jointly and severally : Every partner is jointly and severally liable for the acts of the firm done while he was a partner (s.25).
• Duty to attend diligently : Every partner should attend his duties diligently in the conduct of the business of the firm [s.12(b)].
• Duty not to assign his Rights : A Partner cannot assign his rights and interest in the firm to an outsider by making him as the Partner of the firm (s.29).

A partner can assign his share of the profits and share in the assets of the firm to a third party (referred as Sub Partner). However, such assignee does not become a partner of the Firm

5 Liabilities of a Firm and its Partners to Third Parties

Indian Partnership Act 1932 Liabilities to Third Parties

Third Party means any person who is not a Partner in the Firm. A partner is an Agent of the Firm and of all other Partners of the Firm. So, a Partner can act on behalf of the Firm. The Partner is solely and jointly liable to third parties for all acts done by him on behalf of the firm.

• Extension and restriction of partner’s implied authority (s. 20): The Partners in a firm can extent or restrict the implied authority of any partner by a mutual contract between them.

• Rights of Third Party : However, this does not affect the rights of Third Party. The firm continues to be liable to him for all acts falling within the scope of his implied authority
• Secret Restriction :  If any secret restriction is imposed on the implied authority of a partner, the third party is not affected, unless he has notice of it.
• Partner Exceeding Authority : Where a partner exceeds his authority, the firm shall not be liable for such act, since it does not amount to an act of the ‘firm’.
• Representation by a partner: Where a partner makes any representation relating to the affairs of the firm, it is binding on the firm. The partners are agents of each other for carrying on the business of the firm. (s. 23)
• Notice to a Partner: Notice to a Partner dealing with the affairs of the firm (i.e Active Partner) is treated as the notice to the firm. This is based on the rule that notice to an agent, of matters relating to his agency, is the notice to the Principal (s. 24).
• Liability of partners for acts of the firm ‘Act of a firm’ means any act or omission by all the partners, or by any partner, or agent of the firm, giving rise to a right enforceable by or against the firm (s.2(a)). Every partner is severally and jointly, with all other partners, liable for all the acts done while he is a partner. (s. 25):

Partner acting on his own account : But, if a partner of the firm deals with a third party on his own account, the firm shall not be liable to the third party.

• Wrongful acts of a partner: A Partner is an agent of the firm. Therefore, the firm shall be liable for any loss caused to a third party due to wrongful act committed by a partner (s. 26). The firm would be responsible for any act of the partner while acting in the ordinary course of business (i.e., within his implied authority), or with the authority of all other partners (i.e., within his express authority)
• Misappropriation of money or property: A third party may hold the firm liable for misappropriation of money (s. 27).

The firm would be responsible for act of partner in following cases:

• Where a partner, acting within his apparent authority, receives money or property from a third party and afterwards such partner misappropriates it.
• Where the firm receives money or property from a third party in the course of business, and afterwards any partner misappropriates it while the money or property was in the custody of the firm.
• Liability by holding out: If a person becomes a partner by holding out, he is liable as a partner on the principle of ‘partner by holding out’.

6 Authority of a Partner

Indian Partnership Act 1932 Authority of Partner

Authority of a partner means the capacity (i.e, power) of a partner to bind the firm by the acts done by him.

A Partner performs dual role in the Firm. As principal as well as an agent.

• As principal, he can act on behalf of the firm and bind the firm
• As agent of the firm, any act of a partner, done within his authority (express or implied), shall be an act of the firm and consequently the firm shall be bound by it (s.18).

Authority of Partners may be broadly classified as :

Express Authority : Authorities mutually agreed upon by the Partners and conferred upon the Partners are called Express Authority.

Where all the partners mutually agree to confer certain powers (called as Express Authority), on a partner (orally or written), such partner can exercise all such powers and he shall be called as acting within his express authority. The firm shall be bound by all the acts of a partner falling within his express authority.(s.20).

Implied Authority : Implied authority is not expressly conferred on a partner, but the persons dealing with the firm may rightfully assume that such type of authority has been conferred on every partner of the firm (s.19(1)).

A firm shall be bound by all the acts falling within the implied authority of a partner, if the act done by the partner in usual manner in the name of Firm and it relates to the normal business of the firm (s.22),

Where a partner does any act in his own name, the firm shall not be bound by such an act, even if the act relates to the business of the firm and is done in the usual way.

Partner’s Authority in Emergency

An act falling outside the authority (whether Implied or Expressed) does not ordinarily bind the firm. An Act done by the Partner, in case of emergency, to save the firm from loss, shall be binding on the Firm, even if the partner exceeded his authority (s.21)

The firm would be responsible for the act of partner, if the partner had acted prudently, as a person of ordinary prudence would have acted in his own case, under similar circumstances.

Ex. Mr. Sen, a partner, receives goods at Delhi for being sent to a purchaser at Mumbai. Mr. Sen may sell the goods at Delhi, if they will not bear the journey to Mumbai without spoiling.

7 Acts of Partner within Implied Authority

Indian Partnership Act 1932 Implied Authority of Partner

Implied authority is not expressly conferred on a partner. Persons dealing with the firm should presume that every partner in a Trading Firm, has such authority (s.19(1))

• Purchase Goods :  To purchase goods, which are used in the business of the firm, on behalf of the firm.
• Sell Goods :  To sell the goods of the firm.
• Receive Payment : To receive payment due to the Firm and issue receipts thereof.
• Appoint Employees : To engage servants to perform the business of the firm.
• Borrow Money : To borrow money for the purpose of carrying on business of the firm.
• Pledge Firm’s property  : To pledge the Firm’s property for seeking / repayment of borrowings made for the purpose of business of the firm.
• Draw Instruments  : To make, draw, Accept and indorse bills and other negotiable instruments in the name of the firm.
• Legal Action : To take legal action, engage a lawyer to defend an action

8 Restrictions on Implied Authority

Indian Partnership Act 1932 Limitation of Implied Authority of Partner

Statutory Restrictions of Implied Authority  

The firm shall not be bound by any act, falling within the following ‘statutory restrictions’, whether or not the other party had knowledge of such restrictions :

• Banking Account : To open a banking account, on behalf of the firm, in his own name.
• Withdraw Legal Suit : To withdraw a suit or proceedings filed on behalf of the firm.
• Admit Liability : To admit any liability in a suit or proceedings against the firm.
• Compromise : To compromise or relinquish any claim or portion of claim by the firm.
• Arbitration : To submit a dispute to arbitration.
• Immovable property : To acquire property on behalf of the firm, or transfer immovable belonging to the firm.
• Enter into partnership : To enter into partnership on behalf of the firm. [s.19(2)]

Restrictions of Implied Authority imposed by Mutual Agreement

Apart from statutory restrictions, some additional restrictions may be imposed on implied authority of partner (referred as ‘Restrictions imposed by mutual agreement’), by consent of all the partners.

• Examples of ‘Restrictions imposed by mutual agreement’ : Restriction on purchase or sale by a partner, Restriction on borrowing money, Restriction on receiving money from the customers, which otherwise would be considered as Implied Authority conferred by the Partnership Act.
• Implications of ‘Restrictions imposed by mutual agreement’ :The effect of these restrictions is that the firm shall not be bound by any act falling within such ‘other restrictions’, if the other party had knowledge of such restriction.

Hence, if the other party had no knowledge of the restriction imposed on the implied authority of a partner, the firm will be bound by the act of the partner.

9 Partners Decisions

Indian Partnership Act 1932 Decision of Partners

Every partner has a right to be consulted and express his opinion in all matters relating to the business of the firm.

Every Important matter is to be decided as per consensus of the Partners.

• Majority Consent: Any difference of opinion arising amongst the partners on an ordinary matter, shall be resolved by majority of partners.
• Unanimous Consent: In case of fundamental issues as follows, unanimous consent is required. Such decision cannot be implemented, if even a single partner objects to it.

• Change in nature of business:  Matters relating to change in business (i.e., change in the nature of business carried on by the firm, or alteration of agreed business, or addition of a new business) (s. 12)
• Restrictions on implied authority of a partner: Imposition ofRestrictions on implied authority of a partner (s. 20)
• Admitting a minor to the benefits of partnership  : A minor can be admitted to the benefits of partnership with the consent of all the partners of the firm (s. 30)
• Admission of a partner: A new partner can be admitted only with the consent of all existing partners (a new partner can also be admitted in accordance with an express agreement entered into between the partners) (s. 31)
• Change in profit sharing ratio : The profit sharing ratio of partners can be changed only with the consent of all the parties.

10 Reconstitution of Firms

Indian Partnership Act 1932 Reconstitution of Firms

 A partnership firm is not a legal entity. It has no perpetual existence as in case of a company incorporated under Companies Act. The partnership firm has limited rights of continuity of business despite change of partners (termed as reconstitution of a firm).

Reconstitution of Firm means change in Partners of the Firm

Mode of Reconstitution of Firm : A firm may be reconstituted in any of the following modes:

• Admission of a new Partner (S. 31)
• Retirement of Partner (S. 32)
• Death of a Partner (S. 35)
• Insolvency of Partner (S. 34)
• Expulsion of a Partner (S. 33)
• Transfer of a Partner’s interest (S. 29).

On Reconstitution, the firm continues and the resulting Firm said to be ‘Reconstituted Firm’ after such change. When a partner goes out and another joins, though the number of partners remain same, the firm is a reconstituted firm as the partners are now different.

A change in the profit sharing ratio of the existing partners is also treated like reconstitution of Firm. In such a situation, the partner who gains by change in profit sharing ratio must compensate the partner who has made the sacrifice. This effectively amounts to one partner buying the share of profits from another partner.

11 Admission of New Partner

Indian Partnership Act 1932 Admission of New Partner

The firm may allow admission of new partner in the partnership business

A person may be admitted as a new partner as follows:

• By Consent of existing Partners : Normally a new partner is admitted with the consent of all existing partners
• By Agreement : A new partner may be admitted  in accordance with a contract already entered into between the existing partners [s.31(1)]. In such case, unanimous consent  is not needed for  admission of  such new partner.

Ex: B and R were partners in a firm. One of the terms of the partnership deed was that B could introduce into the partnership, any of his sons on attaining the age of 21. B’s son S attained the age of 21 and B proposed to make S a partner.  S is to be taken as new on the basis of partnership agreement.

• Minor attaining Majority : If a Minor Partner opts to become a partner on attaining age of majority.

The acts of the old partners cannot be ratified by new partners.

Liabilities of an Incoming Partner

• Pre admission Acts of the Firm: New Partner does not become liable for any act of the firm done prior to his admission [s. 31(2)].
• Old Liabilities of the Firm : However, the new partner may be made liable for the past liabilities of the firm by mutual agreement.

But  such agreement  does not give right to the creditors of the firm to sue the new partner for the recovery of their debts, since, the new partner was not in existence, as principal, at the time when the debts arose.

A new partner is not liable for the past acts of the firm, unless there is an agreement to the contrary.

A new Partner is liable for the acts of the old firm only if the new firm assumes the liabilities of the old firm and the creditors Accept the new firm as their debtors to discharge the old firm from its liability.

• Minor attaining Majority : The  Minor who opts to become the partner on majority, is liable to all acts of the firm since he was admitted to its benefits.

12 Retirement of Partner

Indian Partnership Act 1932 Retirement of Partner

Retirement means exiting from Partnership (retirement is not related to age of partner. A partner may remain a partner, until death, irrespective of his age or physical health). (s. 32)

A Partner may retire from a firm in following ways :

• Express Agreement : In accordance with an express agreement by the partners
• Own Will : In case of the partnership at will, by giving notice in writing to all other partners of his intention to retire [s.32(1)].
• Will of others : At the instance of other partners (called Expulsion of Partner)

Effect of Retirement

• Continuation of Old Firm : One retirement, a partner withdraws from the firm and the other partners may continue to carry on the business of the firm without dissolution of partnership between them.
• Share of Profit : The share of profit and interest of the retiring partner is taken over by the existing partner in an agreed manner.

13 Rights & Liabilities of a Retired Partner

Indian Partnership Act 1932 Rights & Liabilities Of Retired  Partner

A Partner, sometime enjoys some rights and is subject to some liabilities, even after retirement, in some situations.

Rights of a Retired Partner: A retired partner can exercise the following rights:

• Carrying on Competing  Business  : A retired partner may carry on a business competing with that of the firm

Restriction on retiring partner on carrying on competing business :

• A Retiring partner can not use the name of the firm, represent himself to be a partner of the firm; or Solicit the existing customers who were dealing with the firm before his retirement [s.36(1)].
• The retiring partner may be restrained from carrying on competing business, within specified local limits, when such restraint is reasonable
• Advertise : The retiring partner has the right to advertise his new business.
• Non Settlement of Accounts : Where the accounts of retiring partner is not finally settled,  the retiring partner is entitled to share profits earned by the firm after his retirement, or Interest (s.37).

On non-settlement of accounts of retiring partner, the retiring partner is entitled to either higher of the following :

• Profits : To share profits earned by the firm after his retirement,
• Interest : To claim interest at the rate of 6 per cent per annum on the amount of his share in the property of the firm, whichever is higher
• Share of profits / property : He can claim his share out of profits and property of the firm and can use such share either to pay his debts or in the manner he may like.

Liabilities of a Retired Partner : A retiring partner may be liable for Debts incurred by the firm before his retirement, and in some cases, even after his retirement from the firm, as described below:

• Liabilities for debts incurred before retirement: A retired partner continues to be liable for all the acts of the firm done before his retirement or the acts pending at the time of his retirement, unless he is discharged from his liability.

Exception : However, a retired partner shall not be liable for any act done before his retirement in the following circumstances :

• Agreement with Other partners : Where the retiring partner enters into an agreement with other partners that he shall not be liable for past debts of the firm.
• Agreement with Creditors : Where the reconstituted firm enters into a contract with creditor to the effect that the old firm is discharged, and the reconstituted firm is taken as debtor. In this case, the creditor cannot sue the retiring partner for past debts.
• Liability for debts incurred after retirement: A retiring partner, with other partners at the time of retirement, continues to be liable as partner to the third parties for any act done by any of the partners after retirement, until public notice of his retirement is given [s. 32(3)].

If public notice is not given, the firm shall continue to be liable for all acts of the retired partner subsequent to the date of retirement.

Such public notice may either be given by the retiring partner or any of the partners of the reconstituted firm [s.32(4)].

Exception : But a retired partner is not liable for the acts of the firm done after his retirement, provided the persons dealing with the firm do not know that he was a partner as such (e.g., he was sleeping or dormant partner(s.32(3).

Ex. A, B, C and D are partners in a firm. A, B and C are active partners, while D is a dormant partner. C and D retire from the firm without giving public notice. A and B take E into partnership continuing the old firm name. The firm shall continue to be responsible for acts of C, until public notice of retirement of C is given.

14  Expulsion of a Partner

Indian Partnership Act 1932 Expulsion of Partner

Expulsion means forceful removal (forcing someone to exit). Expulsion of Partner means removal of any partner. A Partner may be expelled from Partnership in certain situations, in following ways (s. 33):

Regular Expulsion: A partner may be expelled from the partnership where Power to expel is specified in Partnership agreement (referred as Regular Expulsion)

A Partner may be expelled under Regular expulsion, if the partner sought be expelled, is given a reasonable notice and opportunity, such power of expulsion is exercised in good faith by a majority of the partners, in the interest of the firm;

• Rights & Liabilities of Partner under Regular Expulsion : Rights and Liabilities  of an expelled Partner in case of Regular Expulsion would be similar as that of a Retiring partner [s.33(2)].
• Public notice : Public notice in respect of expelled partner must be given. The expelled partner is liable for all the acts of the firm subsequent to his expulsion, until a public notice is given.

If public notice is not given, the firm shall continue to be liable for all acts done by the Firm before expulsion of the Partner, even subsequent to the date of expulsion.

Irregular Expulsion:  Expulsion not satisfying the conditions of Regular Expulsion, as stated above, is treated as Irregular Expulsion. An irregular expulsion is ineffectual and inoperative and the expelled partner does not cease to be a partner.

A Partner expelled under irregular expulsion has right to claim re-instatement as a partner and to sue for his share in capital and profits in the firm (but cannot claim damages).

15 Insolvency of a Partner (s. 34)

Indian Partnership Act 1932 Insolvency of Partner

The Partner adjudicated insolvent, ceases to be a partner from the date of the order of adjudication.

• Continuance of Firm : Though the firm is dissolved on the date when the Partner is adjudicated insolvent, other partners may decide that the firm shall continue.
• Property of Insolvent Partners : After the order of insolvency, the property of insolvent partners will not be liable for the acts of the firm.
• Public Notice : A Public Notice relating to the insolvency of partner is not required.
• Liability of Firm : The firm is not liable for any act of the insolvent partner after the date of the order of adjudication [s.34(2)].

16 Death of Partner

Indian Partnership Act 1932 Death of Partner

On Death, the deceased partner ceases to be a partner and the partnership between the partners comes to an end [s. 35, 42(c)]

Dissolution of Firm : As specified in the Partnership agreement :

• Firm Dissolved : The firm is dissolved by the death of a partner, if agreement so provides [s. 42(c)].
• Firm not Dissolved : If firm is not dissolved, the estate of the deceased partner will not be liable for any act of the firm after his death (s. 35).

However, if all the Partners (or except one Partner) dies, death of a partner shall result in dissolution of the firm

No public notice : On death of a partner, no public notice is required.

17 Transfer of Partner’s interest to outsider

Indian Partnership Act 1932 Transfer of Partner’s interest to outsider

A partner may transfer his interest in the firm to another person (s.29)

A partner may transfer his interest (e. Profit / Loss), absolute or partial, by Sale or Mortgage. This is distinct from retiring himself and inducting another partner. The transferee dos not become a partner in firm. He is only entitled to the transferor partner’s share.

In case of such transfer of Interest  in the firm, the transferee is not entitled to interfere in the conduct of the firm, require accounts of the firm or inspect the books of the firm.

• Share of profit  : A transferee becomes entitled to receive the share of profit of the transferring partner and must Accept the accounts or profits agreed to by the partners [s.29(1)].
• Termination / Dissolution  : If the transferring partner ceases to be a partner, or if the firm is dissolved, the transferee is entitled to receive the transferring partner’s share in the assets of the firm (the share that the transferring partner would have received). He is entitled to an account as from the date of dissolution to ascertain that share [s.29(2)].

18 Rights and Duties of Partners in a Reconstituted Firm

Indian Partnership Act 1932 Rights & Duties of Partners in  Reconstituted Firm

On reconstitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same, as far as may be, as they were immediately before the change (s.17(a)).

Incoming Partner : In case of admission of a partner, the old partners shall continue to share the profits in the same proportion in which profits were shared before admission of new partner.

Outgoing Partner : In case of retirement, insolvency, death or expulsion of a partner, the old partners shall continue to share the profits in the same proportion in which profits were shared before retirement of such partner. 

• Partnership for Fixed Period:   In case of Partnership for Fixed Period, where the firm, continues to carry on business after the expiry of the term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will. [s.17(b)]
• Particular Partnership : Where a firm was constituted to carry out specific ventures or undertakings, the mutual rights and duties of the partners in respect of the other ventures or undertakings are the same as those in respect of the original adventures or undertakings. [s.17(c)]

Continuing Guarantee

Any change in constitution (re constitution of firm),  will have effect of revoking any continuing guarantee to that firm or to the third party, in respect of transaction of firm, from the date of change in constitution, unless there is an agreement to the contrary (s.38)

Ex. A was surety in a firm, for the conduct of B, a cashier of the firm . Later on a change took place in the constitution of firm (partners changed). It was held that the surety was not responsible for the act of B, subsequent to change in the constitution of firm.

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