CONTRACT

LAW - II
TOPIC: Rights and Abilities of an Outgoing
Partner - A Study
 SYNOPSIS

 INTRODUCTION

 OUTGOING PARTNERS

 RETIREMENT OF PARTNER

 EXPULSION OF PARTNER

 INSOLVENCY OF PARTNER

 LIABILITY OF ESTATE OF DECEASED PARTNER

 RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING

BUSINESS

 RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE

SUBSEQUENT PROFITS

 CONCLUSION

 END NOTES
 INTRODUCTION

The Indian Partnership Act was enforced on 1st October, 1932. The

present Act outdated the earlier law relating to Partnership, which

was in the Chapter XI if the Indian Contract Act, 1872. Section 4 of

the Indian Partnership Act, 1932 defines partnership as a relationship

between two persons who mutually agree to share the profits and

losses in the business. Persons who have entered into partnership

with one another are called individually ‘partners’ and collectively ‘a

firm’, and the name under which their business is carried on is called

the 'firm name'.

Partnership is a form of business organization where two or more

persons who have agreed to share the profits and losses of a firm

and join together to do business by all or any one of them

representing them all. But all the partners do not equally participate

in all the activities of the firm. There are several types of partners

classified on the basis of their extent of liability and their

participation in the firm.

OUTGOING PARTNERS

An outgoing or a retiring partner is a partner who retires voluntarily

and ceases to be a partner without the dissolution of the firm. He

leaves the existing firm. Thus, he is called as an outgoing partner. An

outgoing partner is liable for all his debts and obligations acquired

before his withdrawal. But he can be held accountable for his future
obligations, if at all he fails to give a public notice stating his

retirement from the partnership firm.

RETIREMENT OF PARTNER

Section 32 of the Partnership Act deals with the retirement of

partner:

1. A partner may retire under the following 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.

Thus, when a partner retires, it does not mean the dissolution of the

firm but that the other partners continue to carry on with the
business. It only severs the partnership between the outgoing

partner and the other existing partners of the firm.

2. 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. This means that the

liability of the outgoing partner towards third party would be settled

only if there is an agreement between the outgoing partner and the

third party, and the partners of the reconstituted firm. In the case,

Syndicate Bank v. R.S.R. Engineering Works (2003), the court held

that the outgoing partners are not liable to the plaintiff and only the

continuing partners are held accountable.

3. 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

party. This means that outgoing partner and the other partners will

continue to be liable for any act done by them before the retirement

which makes it an act of the firm, until he publicly notifies his

retirement from the firm. The retired partner is not accountable to

any third party who deals with the firm without knowing that he was

a partner of the firm.

4. Notices under sub-section (3) may be given by the retired

partner or by any partner of the reconstituted firm.

 EXPULSION OF A PARTNER

Section 33 of the Indian Partnership Act deals with the expulsion of

the partner. It states that:

(1) A partner may not be expelled from a firm by any majority of

the partners, save in the exercise in good faith or 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.

If the above conditions are not met then the expulsion will be null
and void.

 the power of expulsion was stated in the agreement between

the partners;
 the power has to be exercised by a majority of the partners;
 it has to be done in good faith.

A partner can be expelled only if:

 Expulsion of the partner is essential for the interest of the

partnership.
 Notice of expulsion is served to the expelled partner.
 An opportunity given to the expelled partner to state his
opinions.

INSOLVENCY OF A PARTNER
Section 34 deals with the insolvency of a partner. It states that:

(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.

This means that when a partner is declared to be insolvent by the

court, he or she ceases to be a partner of the firm from the date of

the judgement.

(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.

This says that his property that is under adjudication is not

accountable for any acts of the firm even if the partnership dissolves
or not and the partnership is not liable for any act of insolvent

partner.

LIABILITY OF ESTATE OF DECEASED PARTNER

Section 35 of the Partnership Act states that, ‘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.’ This means that after the

death of a partner, the partnership comes to an end but if the

partnership does not get dissolved, then the deceased partner’s

estate is cleared from all liability for the future acts of the firm.

Let us consider, ‘A’ was a partner in a firm. The firm ordered goods

when ‘A’ was alive but it was delivered only after A’s death. In such a

case, A’s estate would not be held liable for the debt as a creditor can

have only a personal decree against the continuing partners and their
assets. Thus, if sued for the goods delivered, ‘A’ or his representatives

will not be held accountable because there was no debt of the goods

in A’s lifetime.

RIGHTS OF OUTGOING PARTNER TO CARRY ON

COMPETING BUSINESS

According to Section 36 of the Partnership Act states that -

(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

(a) use the firm-name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm

before he ceased to be a partner.

This means that a retired partner can start a business that is similar

to the firm he retired from but there are certain restrictions to it.

(2) AGREEMENT 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 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.

This means that an outgoing partner can make an agreement with

the other partners that when he retires from the firm, he will not do

or start any business related to that of the firm within a specified

time period or local limits.

 RIGHT OF OUTGOING PARTNER IN CERTAIN

CASES TO SHARE SUBSEQUENT PROFITS

Section 37 of the Indian Partnership Act states that if an outgoing

partner and the continuing partners carry on the business of the firm

with the property of the firm without any final settlement of

accounts between them and the outgoing partner or his estate, and

there is no agreement stating as to what has to be done in such a

situation, then the outgoing partner or his estate is entitled at the

option of himself or his representatives to share of the profits made

ever since he ceased to be a partner. The outgoing partner is entitled

to use his share in the firm’s property or the interest at the rate of six

percent per annum of the share in the firm’s property of the outgoing
partner. Or the continuing partners could also purchase the share of

the outgoing partner, which in turn means that the outgoing partner

has no rights to any further share of profits.

In Mrs. Halima Bai v. Sparkle-Ads-firm (2014), the plaintiffs and the

defendants were in a partnership comprising of four members and

each of the partner has contributed a sum of Rs.10,000/- towards

share capital and the partnership was at will. The plaintiff expressed

her desire to retire from the partnership and sent a letter to the

defendant stating so. After the plaintiff retired, the firm was

reconstituted by the continuing partners and carried on business.

The plaintiff the firm was dissolved and claimed that the firm did not

settle her accounts on retirement even after several demands and

that she demanded to settle all her shares in respect to transactions.

The court held that even if Section 37 of the Indian Partnership Act
talks about the rights of outgoing partners, she cannot claim profits

of the partnership firm after her retirement as there is no

contribution from her side and the claim of 1/4th share of the

plaintiff on the basis of her contribution towards the capital which is

Rs.10,000/-. As the firm did not dissolve at the time of the plaintiff’s

retirement as claimed by the plaintiff, "she cannot claim in the

subsequent profits made by the firm. Thus, the defendants were not

held liable.

CONCLUSION

Partnership is a main type of business which is common worldwide.

In partnership firms, the outgoing partner have rights and liabilities.

The Indian Partnership Act, 1932 contains complete guidelines, as it

covers all the aspects related to the partnership and Section 32 to

Section 37 show us who an outgoing partner is and what are their

rights and liabilities are.

END NOTES

 The Partnership Act, 1932

 Singh, Avtar; Introduction to Law of Partnership, 5 th Edition,

Eastern Book Company (1994).

 Desai, Satyajeet A; The Law of Partnership in India, 7th Edition,

LexisNexis Butterworths Wadhwa, Nagpur (2009).