This article is written by Ilashri Gaur, a law student pursuing B.A. LLB (Hons.) from Teerthanker Mahaveer University (CLLS). This article contains information regarding the whole concept of outgoing partners including their rights.

Introduction

Let us first understand the meaning of outgoing and incoming partners. ‘Incoming partner’ is one who is joining the partnership firm by contract and ‘outgoing partner’ is the partner who is leaving the partnership firm. So whenever any partner leaves the firm he has the rights in regards to the benefits that he had earned during the period of being a partner of that firm. 

Outgoing Partners

Section 32 to 38 of the Indian Partnership Act deals with the different ways in which a partner may become an outgoing partner with their rights and liabilities. A partner may cease to be the partner in the following ways:

1. Retirement of the partner: section 32 deals with this part. It says that a partner may retire under certain circumstances:

• With the consent of all the other partners.
• With the express agreement of the partners.
• If it is a partnership at will, then by giving notice of retirement to all the other partners.

1. A retiring partner may be free from any liability to any third party for the acts of the firm by an agreement made by the outgoing partner with a third-party done before his retirement and such agreement being implied during the dealing.
2. The retiring partner and the other partners will continue to be liable for any act done by them which would have been an act of the firm. It simply means that the retired partner is not liable to any third party who deals with the firm without knowing that he was a partner of the firm.
3. Notice under the sub-section (3) may be given by the retired partner or by any partner of the reformed firm.

Outgoing partner by notice

In case of partnership at will, a partner may retire from the partnership by giving notice of his intention to retire to all the other partners. In partnership at will, a partner has also a right to get a firm dissolved by giving a notice in writing to all the other partners of his intention to dissolve the firm.

The need for such a notice is required when all the other partners either do not agree to the retirement of a partner or they are not available to give their consent for the retirement of a partner.

Expulsion of partner

Section 33 of the Indian Partnership Act deals with the removal of the partner, It says that a partner can be removed only when these conditions are satisfied:

• Removal of the partner is necessary for the interest of the partnership.
• Notice is given out for the removed partner.
• An opportunity of listening to the expelled partner.

And if these conditions are not fulfilled then such expulsion will be considered as null and void.

Insolvency of the partner

Section 34 deals with the insolvency of the partner; It says that when a partner is declared as insolvent by the court, it leads to certain consequences and those are:

• He ceases to be the partner of a partnership firm from the date of judgment.
• The partner’s property which is in possession of an official liquidator ceases to be liable for any acts of the firm whether the partnership subsequently dissolves or not.
• He ceases to be the partner of a partnership firm from the date of adjudication.
• His estate which is in possession of an official liquidator ceases to be liable for any acts of the firm whether the partnership subsequently dissolves or not.
• Partnership ceases to be liable for any act of insolvent partner.

Liability of estate of a deceased person

Section 35 deals with the liabilities of the personal assets of a deceased person. It says that generally, a partnership comes to an end on the death of a partner but if there is a contract between the partners to continue the partnership even after the death of a partner then the surviving partners will continue with the firm after clearing the deceased partner’s estate from any liability for the future acts of the firm.

Rights of outgoing partners to carry on competing for business

Section 36(1) of the Indian partnership act deals with the rights of the outgoing partner; It imposes certain restrictions but allows an outgoing partner to carry on the business competing with that of the firm following are some of the restrictions regarding the same:

1. Cannot use the firm name.
2. Cannot represent himself as a member of the partner.
3. Cannot solicit the customs of the person who was dealing with the firm before he ceased to be a partner. 

Section 36(2) of the Indian partnership act deals with the agreement in restraint of the trade. According to this section, an outgoing partner may make an agreement with his partners that, when he ceases to be a partner of the firm, he will not carry on any business related to that of the firm within a specified period or local limits.

Right of outgoing partner in certain cases to share future profits

Section 37 deals with the rights of an outgoing partner in certain cases to share subsequent profits. It says that if any member of the firm dies or ceases to be the partner of the firm and the other partner carries on the business without any final settlement of the account between them; Then the outgoing partner is entitled to share his profits made by the firm, since he ceased to be a partner. The outgoing partner or his representative is entitled to use his share in the property of the firm or the interest at the rate of six percent per annum on the amount of the outgoing partner’s share in the property of the firm. 

The other option for the remaining partner is to purchase the share of the deceased or outgoing partner. If the remaining partner chooses to buy the share of the outgoing partner than the outgoing partner is no more entitled to get his share of profit.

Case laws

Pradeep Arora & Ors. vs Samantha Kochhar (2016)

In this case there were 5 partners, four of them were the petitioner and the fifth one was respondent. They entered into a partnership; The dispute between the parties was related to arbitration. The respondent claims the petition whereas the petitioner filed a counterclaim. One of the claims of the respondent was for the recovery of a sum of Rs.24,50,000 invested by her in the partnership business with the interest of 12% on the capital contribution by the claimant from the date of investment till the time of termination that is 22nd March, 2011 amounting to Rs. 2,04,280 with the interest of 24% was claimed from 22nd September, 2011 till the date of filing the claim and future interest as well. Several issues were raised regarding the counterclaim. In the end, it was held that the court does not find any relevance in the previous judgment. The Supreme Court emphasized that the accounts would have to be rendered. It is pointed out that the firm was an unregistered firm and therefore, an individual person in their personal capacity does not file a suit against the partner for return of the amount which was invested in the firm as a capital contribution.

Mrs. Halima Bai vs Sparkle-Ads-Firm (2014)

In this case the appeal is directed against the decree and judgement passed during the final application in the court of chennai. In the partnership firm there were four partners. Two of them were plaintiffs and the other 2 were defendants in the partnership deed. The partnership firm was engaged in advertising business and allied matters. Each of the partners has contributed a sum of Rs.10,000/- towards a share capital and the partnership was one at will. The plaintiff expressed her willingness to retire from the partnership firm and sent a letter. In that letter it was acknowledged by the defendant and confirmed that the plaintiff was deemed to have retired from the partnership firm. It was contended by the plaintiff that the partnership firm did not settle her accounts on retirement despite several demands and that she demanded to settle all her shares in respect to transactions. After all this the court held that there is no doubt that section 27 talks about the rights of outgoing partners. It was said that she cannot claim profits of the partnership firm subsequently as there is no contribution from her side and the claim of 1/4th share of the plaintiff is arrived due to her contribution towards capital. The outcome is that the appeal was dismissed after confirming the judgement and decree of the court.

Commissioner Of Income-Tax vs Sant Lal Arvind Kumar (1981)

In this case there are four partners, Shri Sant Lal, Shri Hukam Chaad, Smt. Premwati and Gaytri Devi. The original partnership deed contained no provision that the death of any partner would not dissolve the firm. A partnership deed was executed under which the three other partners constituted a partnership with a grandson of Shri Sant Lal and this partnership continued to carry on the business as previously carried by the previous four partners. Shri Sant Lal had 30% share in the firm out of which 25% was given to his grandson and 5% was added to the share of Smt.Gayatri Devi. The assesses s claim that on the death of Shri Sant Lal the earlier firm had been dissolved, consequently there were two separate and independent firms in existence for the two periods. The minority judgement in the allahabad high court decision earlier referred to present a point of view that even though a case falls under Section 187 there should be separate assessments of the firm as it stood before the change and after the change. Thus if this section is applied, the partners of the firm will not suffer any disadvantage because the income of the previous year will be allotted on a time basis and the cases under reference only to the partners who were there during the relevant period.

For the reasons mentioned above the court form a opinion that:

• The tribunal was right in holding that an assessment should be made on the firm.
• The appellate tribunal was right in directing that to separate assessments should be on the firm;
• They make no order as to costs.
• The firm gets dissolved and there is no basis for urging that the income tax officer entitled the consequences.

B.K.Kapoor & Anr vs Mrs.Tajinder Kapoor & Anr (2008)

In this case, the plaintiff-respondent filed a suit for dissolution of the partnership and claimed that as per the terms of the agreement the plaintiff was entitled to 18% of the profit in the first Rs.75,000, 12% in the next Rs.75,000 of book profit and 8% in the balance amount of book profit. 

As the relation was not well mentioned in the plaint due to which it was difficult to continue the partnership. So, a notice of suit was issued to the petitioners who moved an application under Section 8 of the Act claiming that the suit raised is covered under the arbitrary agreement. 

But in the end it was held that the petitioners are seeking the dissolution on the just and equitable grounds covered under Section 44 of the arbitrary act and not as the term of the partnership deed and therefore the matter could not be referred to the arbitration under section 8.

Conclusion

Partnership is a very common type of business which is prevailing worldwide, as it contains many disadvantages and advantages. In partnership firms the outgoing partner has certain rights and liabilities for the same. When the partner leaves the firm either due to the retirement or due to the death it is called as the outgoing partner. There are various criteria to leave the partnership firm which are given in the Indian Partnership Act,1932. The Indian Partnership Act provides complete guidelines, as it covers all the aspects related to the partnership.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: