This article on the Legal consequences of Admission or Retirement of partners has been written by Arkadyuti Sarkar, a student pursuing his B.A. LL.B from Shyambazar Law College under the University of Calcutta.

Introduction

A partnership firm undergoes reconstitution with the admission, retirement, expulsion or insolvency of its constituent partners.

Section (31-35) of the Indian Partnership Act, 1932 consists of the provisions relating to the legal effects of admission or retirement of partners in a partnership business. Now, let us introspect those provisions and acknowledge the legal consequences.

Introduction of Admission of partners

According to Section 31 of this Act, based upon the contract between the partners and subject to the provisions under Section 30, no one can become a partner of a firm without the consent of all other existing partners.

Also, according to this section and reckoning with the provisions of Section 30, the new partner shall not be liable for any act of the firm which has been done prior to his admission as a partner.

According to Lindley, upon the death of a partner, his executors or devisees are not rightfully entitled to insist on being admitted into partnership with the surviving partners, unless there has been some effective agreement entered into by them.

According to Halsbury, an incoming partner is subject to the partnership terms, except there is variance by an expressed agreement, though he may be unbound by any special term unnoticed by him.

Illustration

1. Mr X desires to become a partner of ABC firm; where A, B, & C are existing members. So Mr X in order to become a partner must obtain consent from A, B, and C.
2. Mr M becomes a member of firm GHI with the consent of its existing members. In succession to his admission as a partner, Mr M shall be liable for all activities of the firm, starting from the date of his admission as a partner and not any activities are done before.

In Income Tax Commissioner v. Seth Govindram Sugar Mills; the Supreme Court observed that the words “without the consent of all the existing partners” imply that the admission of a new partner is reliant upon the consent of the existing partners. The Apex Court held that no heir of a deceased partner is capable of becoming a new partner, with the surviving partner, without obtaining the expressed or implied consent of such surviving partner.

Rights of newly introduced partner

When a new partner is admitted into the firm, the structure of the firm undergoes reconstruction and a new agreement is made with him for carrying on the firm’s business.

Upon admission, a new partner acquires the following rights:

1. Right to share the assets of the partnership firm; and
2. The right to share the profits of the partnership firm.

Illustration: Mr Y is admitted as a new partner in a partnership firm. He acquires the right to his share over the assets and profits of the partnership firm, through such admission. 

Liability of a new partner

According to Lindley, subject to any expressed or implied agreement, a new partner does not become liable for any act of the firm done prior to his introduction, merely because of his introduction as a partner.

Thus, as mentioned previously, a partner becomes liable for all the acts of the firm starting from the date of his admission excepting those acts which had been done prior to his admission.

Illustration

Mr B becomes the partner in a firm on 03.12.2019. Thereby, from 03.12.2019, Mr B becomes liable for all the activities of the firm that shall be made in the course of the firm’s business. However, he is not liable for any activity of the firm committed or omitted prior to 03.12.2019.

Retirement of Partners

According to Section 32(1) of this Act, a partner of a partnership firm may retire:

1. With the consent of all the other partners of that partnership firm,
2. In accordance with an expressed agreement in this regard by the other partners of the partnership firm, or
3. In case of partnership at will, by serving written notice to all the other partners of the firm conveying his intention of retiring.

However, a retired partner is not liable to any third party who deals with the firm lacking the acknowledgment of his partnership.

In Vishnu Chandra v. Chandrika Prasad; the Supreme Court held that a partner is capable of retiring from the ongoing partnership without dissolving the firm. Also, a partner’s right to retirement has to be determined from the agreement terms.

Rights

Section 36 of the Indian Partnership Act enumerates the rights of an outgoing or retiring partner.

According to this section, an outgoing partner may continue a business competing against that firm and may also advertise such business, but depending upon contract to the contrary, he may not:

1. use the name of that firm,
2. claim himself as a representative of the firm’s business, or
3. solicit the firm’s customers, dealing with the firm, prior to his cessation as a partner of that firm.

Also, a retiring partner may form an agreement with other partners of the firm that he shall not carry on any business, similar to that of the firm’s business, within such specified time period or specified local limit, notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872 if reasonable restrictions are imposed.

In Churton v. Douglas, an English Court held that Section 36 contains what is now regarded as settled law in England on the subject of the sale of the goodwill of a partnership firm.

According to Section 37; during retirement, the retiring partner can reclaim his or her capital share contributed to the firm through the settlement of an account with the continuing partners.

This section further clarifies that if no such account settlement occurs during retirement of the partner, and the firm continues to use the retiree’s capital for the purpose of the firm’s business, then the retired partner shall be entitled to his claim even after his retirement, either:

1. At the rate of 6% per annum at his share in the firm’s property, or
2. Such share over the firm’s profits which are attributable to his capital share in the firm.

In M.C. Sharma v. B.C. Sharma & others; the High Court of Allahabad ruled that the benefit of the application of Section 37 of this Act is unavailable to a sole partner, desiring to continue a firm’s business post-dissolution.

Liability

According to Section 32(2); a retiring partner may be discharged from any liability towards any third party or for any act of the firms done prior to his retirement based upon any agreement on his part with that third party and other partners of the reconstituted firm. Also, such agreement may be implied by a deal between such a third-party and the reconstituted firm succeeding his acknowledgment of the partner’s retirement.

According to Section 32(3); until any public notification is made in the promulgation of such retirement, the retired partner along with the other partners of the firm continue to be liable towards the third parties for any act done by them which would have been considered an act of the done if had been done prior to the retirement.

According to Section 32(4), the aforementioned public notification can be made by the retired partner or any partner of the reconstituted firm.

Illustration

Mr G is a partner at a firm. He resigns from his partnership one day. Thereby, he is discharged from any third party liability or any act of the firm which was incurred in the course of his partnership. However, such liability shall exist until the time of the promulgation of his retirement, through a public notification, made either by him or the continuing partners in the firm.

Expulsion of a partner

According to Section 33, a partner may not be expelled from a firm by the majority of the partners, except in the exercise of bonafide powers conferred through a contract between the partners in the interest of the firm.

Also, an expelled partner is subject to the same rights and liabilities as if he were a retired partner.

However, in case of expulsion against the provision of Section 33, such expulsion shall be deemed irregular and shall be ineffective against the expelled partner. In such a situation, the expelled partner is entitled to his reinstatement as a partner or claim refund for his or her share of capital or profits in the firm.

Illustration

1) A, B, C and D are partners in a firm. Here A, B, and D cannot by majority decide to expel C, unless there exists a contract among them that such expulsion is effective on the bonafide interest of the firm.

2) G, H, I and J are partners in a firm. G, I and J decide to expel H as he is casual and reluctant towards the interests of the firm. Such expulsion is effective and H becomes entitled to the rights and liabilities in resemblance to a retired partner of the firm.

3) M, N, O and P are partners at a firm. M, N, and P acting out of personal grievance remove O from the partnership through the majority. O is entitled to either be reinstated as a partner or to his claim on the share capital or profit of the firm.

Insolvency a partner

According to Section 34 of this Act; when a partner has been adjudicated as an insolvent, he thereby ceases to be a partner of that firm, commencing from the date of the adjudication order, irrespective of the dissolution of the firm.

In case a firm is not dissolved because of some contract between the partners after a partner’s insolvency, the estate of the insolvent partner is not liable for any act of the firm and similarly, the firm is not liable for any act of the insolvent done after the date of the adjudication order.

Illustration

X, Y, & Z are partners in a business firm. Y is declared as an insolvent by the Court on 20.01.2020. Thus, Y ceases to be a partner of that business firm from 20.01.2020.

Also, if there is a contract between X, Y & Z that the business firm shall continue to operate after a partner goes insolvent then the firm shall not be dissolved. Also, Y’s estate shall not be acquired by X & Z for maintaining the firm’s capital fund. Similarly, X & Z shall not be liable for any act of Y after 20.01.2020 as he ceases to be a partner of their business firm.

In Scaria Paul v. Paraoka Industries; the High Court of Kerala dismissed the plaintiff’s appeal and held that judicial intervention at the instance of one party for settling the differences by prohibitory orders against the other in the absence of the relief to dissolve the firm and accounts settlement is undesirable and is not in conformity with the provisions of the Partnership Act.

Liability of estate of the deceased partner

According to Section 35 of this Act, in case of existence of a contract preventing the dissolution of a firm after the death of one of the partners, then the estate of the deceased partner shall not be liable to any act of the firm done in succession to his death.

Illustration

D, E, and F are indulged in a partnership business. They have contracted to prevent the dissolution of the business after the demise of any of them. F dies abruptly one day. Therefore, the business shall not be dissolved. Also, the estate of F, if any, shall not be liable to any activities of the firm after his death and cannot be acquired by the firm for the purpose of funding the capital of the business firm. 

Conclusion

In conclusion, let us briefly summarize what we learned from the article by far:

1. Any person can become the partner in business only with the consent of the other partners of that firm. Such a person on admission as a partner becomes entitled to share the assets and rights of the firm. The new partner also becomes liable for every activity of the firm starting from the date of his admission as a partner, however, such liability commences only from his date of admission and not for any act done previously by the firm.
2. A partner may resign from the partnership business, either by consent of all other continuing partners or on the basis of any prior contract on this behalf or by intimating all the other partners about his intention to resign.
3. A partner may not be expelled by the other majority of the partners, except for bonafide interests of the firm, and after the expulsion, such partner shall be treated as a retired partner and shall thereby become entitled to all the rights and the liabilities of a retired partner.
4. In case a partner has been adjudicated an insolvent by a competent judicial body, such partner shall cease to be a partner in the partnership business commencing from the date of adjudication. Also, the estate of such an insolvent partner cannot be acquired by the firm as he ceases to be a partner in furtherance.
5. In case of existence of any contract, restricting the dissolution of a partnership business after the death of a partner, then such business shall operate after the death of a partner and the firm shall not be entitled to the property of the deceased in any way.