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Outgoing Partners: Rights and Liabilities

Partnerships are essential structures for businesses, allowing individuals to collaborate, share responsibilities, and pool resources. However, the dynamics of partnerships can change, and understanding the rights and duties of outgoing partners is crucial. The Indian Partnership Act, of 1932, provides a structured framework for addressing outgoing partners' rights and duties, ensuring their protection and clear definition.

Section 31 to 38 of the Indian Partnership Act contains provisions with regard to "Incoming and Outgoing Partners".

Incoming partners are those who are admitted into a firm with the consent of all the partners whereas outgoing partners are those who are leaving the firm or have retired from a firm and the business is continued by the remaining partners.

Outgoing partners have certain rights and duties when leaving a partnership. The Act governs the legal principles and regulations related to contracts, including partnership agreements. When a partner decides to exit a partnership, this Act outlines their rights and responsibilities in accordance with the terms of the partnership agreement and the provisions of the Act itself

Outgoing partners may have the right to carry on competing for business, but this right is subject to restrictions and obligations. Section 36[1] stipulates that an outgoing partner cannot commence a business similar to that of the partnership within a specified timeframe and geographical area. In certain cases, outgoing partners may retain the right to share future profits, but the conditions must be clearly defined in the partnership agreement or in accordance with the Act's provisions.

Outgoing Partners' Rights under the Indian Contract Act:

  • Right to Dissociate: If one of the partners wishes to leave the partnership at any time, they must notify the remaining partners in writing. The conditions outlined in the cooperation agreement govern this privilege.
  • Share of Profits/Losses: According to the partnership agreement, departing partners are entitled to a portion of the profits or losses earned by the partnership up until the date of their dissociation.
  • Return of Capital: Following the settlement of any outstanding liabilities, departing partners are entitled to collect their capital contributions to the partnership, as well as their share of accrued profits.
  • Inspection of Books: Partners who are leaving the partnership have the right to examine the financial books and records of the partnership to ensure accuracy in the determination of their dues and share of profits.

Outgoing Partners' Duties under the Indian Contract Act:

  • Notice Requirement: Exiting partners must notify the other partners in writing of their intention to leave the partnership. Usually, the notice time is as outlined in the partnership agreement or as required by local regulations.
  • Liability for Partnership Acts: Until they get public notice of their dissociation or until a reasonable period of time has passed since their dissociation is known, an outgoing partner is still responsible to third parties for the partnership's responsibilities and actions.
  • Settlement of Accounts: Before obtaining their capital and profits, departing partners are required to settle their financial commitments to the partnership, including paying back any unpaid loans, debts, or liabilities.
  • Good Faith and Fair Dealing: To ensure a seamless separation from the partnership, partners who are leaving must act in good faith during the transitional time.
  • Non-Compete Obligations: Exiting partners are required to abide by any non-compete restrictions if the partnership agreement has them in order to prevent unfair competition.

Outgoing Partners
Section 32 to 38 of the Partnership Act deals with the different ways in which a partner may cease to be a partner and his rights and liabilities thereafter. These provisions pertain to situations when the outgoing partner ceases to be a partner, but the firm is not dissolved and it continues with the remaining partners. A partner may cease to be a partner in the following ways:-
  • By retirement (section 32[2])
  • By Expulsion (section 33[3])
  • By Insolvency (section 34[4])
  • By death (section 35[5])
Retirement of a partner (section 32)
  • Retirement here means voluntary withdrawal of a partner from the firm, as opposed to expulsion, when a partner is made to quit. It covers those cases where the firms are not dissolved with the withdrawal of the partner but continue with the remaining partners.
  • Section 32[6] of the act provides the conditions by which the partner can retire:
    • With the consent of all the members of the firm: No partner can retire whenever he likes. The partnership business depends upon the continued support from all the partners. The retirement of a partner might mean a serious dislocation of a whole business. A partner can retire with the consent of all the partners. Such consent may be expressed or implied.
    • In accordance with the express agreement by the partners: The partnership deed provides that a partner may retire with the consent of the majority of other partners or by giving one year's notice; a partner can retire in accordance with such an agreement.
    • In partnership at will by a notice to others:
A voluntary notice is one way that partners might leave a partnership. In accordance with the Indian Partnership Act, partners may give notice, effectively indicating their desire to dissolve the partnership. However, such departures shall be consistent with the provisions of the Partnership Agreement or, in the absence of such provisions, the provisions of the Act.

Thus, a partner may retire by giving a notice to all the members of the other partners of his intention to retire in case of partnership at will.

In the case of Vaiyapuri Mudaliar and Sons v. Sri Arunodhaya Textiles[7], in cases of partnership at will, a partner could retire either under section 32(1)(a) with the consent of all the other partners or under section 32(1)(b) in accordance with the express agreement by the partners.

In the case of Usha Gopirathnam V. Shri P.S. Ranganathan[8], a partner gave a letter of notice by letter written to another partner who habitually was acting retiring from the firm and that his accounts also settled by assessing assets and liabilities of the firm. It was held to be a clear expression of his intention to retire.

If the partner retires or ceases to be the partner that does not imply that the firm is dissolved rather the other partners of the firm still continue to remain in the firm. The partnership between the remaining partners shall continue after the retirement of a partner, so for that it is necessary that after such a retirement there must be at least two remaining partners between whom the partnership is now to continue. Thus, we can say that if all the partners or if only one partner remains then the firm has to be dissolved.

In one of the leading cases of Abbashbhai V. R.G. Shah[9], the Bombay HC held that if on the retirement of all the partners but one, the remaining partner continues the business with other outside parties, as stipulated by the partnership deed, the firm is not dissolved thereby and the old partnership still continues.

If only one partner remains then he can start the partnership with the other members.
By Expulsion (Section 33):
  • According to section 33, the expulsion of a partner is possible only in exceptional cases, when the following two conditions are fulfilled:
    • The power to expel has been conferred by a contract between the partners, and
    • Such a partner has been exercised in good faith.
    Note: The partners in a partnership firm could expel a partner if the partner is found to be held guilty of an offense. In the case of Carmichael V. Evans[10], one of the partners was traveling without a ticket and was convicted and for this, he was given a notice of expulsion which was held to be justified under the given circumstances. The court observed that any circumstances such as unsoundness of mind, physical incapacity, incompatibility of temperament, or dishonesty even outside business may by an express clause in the article be a ground for dissolution of the firm.[11]
Insolvency of a partner (Section 34):
  • According to Section 34, a partner of the firm is adjudicated as insolvent from the date the adjudication order is made and the insolvent person ceases to be a partner, whether or not the firm is dissolved or not.
  • In the case that a partner's adjudication as insolvent does not cause the firm to dissolve per the terms of their contract, neither the firm nor the partner's estate is responsible for any actions taken by the insolvent after the date the order of adjudication is made.
By the death of a partner (section 35):
  • Section 35 states that with the death of the partner in the partnership firm, the firm gets dissolved. It may terminate the existence of the firm but the contrary could happen if there are two partners who want to remain in the firm then, the firm may continue with the remaining partners.

Although on the death of a partner, a firm is dissolved but the other partners agree, the firm may not be dissolved.[12] This gain has been strengthened by the case of Kesrimal v. Dalichand[13]

The following rights arise after a partner ceases to be a partner in the partnership agreements:
  1. Right to carry on a competing business (Section 36).
  2. Right to share subsequent profits until the amount due to him has been paid (Section 37).
Right to carry on a competing business (Section 36).
Section 36(1)[14] of the Indian Partnership Act poses certain restrictions on the rights of the outgoing partner if he has to carry out a competing business subject to his previous partnership firm. These are as follows:
  1. He is not supposed to use the name of the previous firm for his business.
  2. He is barred from representing himself to be part of the business, and, therefore, he is not allowed to mislead the public by misrepresenting that he is still a member of the firm when he is not.
  3. He is barred from soliciting customers or persons who were dealing with his previous firm. He cannot approach the old customers of the previous firm and influence them to his own business. But it is to be noted that if the person has advertised his business and the customers naturally get influenced and get diverted to his business, there is no bar of his attending to them.

Section 36(2)[15] of the Indian Partnership Act deals with an agreement in restraint of trade. It is an exception of section 27[16] of the Indian Contract Act, 1872 which declares any contract in restraint of trade as void. It further mandates that the agreement restraining the outgoing partner from carrying out a similar business for a specified and limited period of time and such restriction should be reasonable.

Right to share subsequent profits until the amount due to him has been paid (Section 37).

A crucial section of the Indian Partnership Act, of 1932, referred to as Section 37, sets forth the guidelines for a partner's retirement from a partnership firm. According to this provision, a partner may leave a partnership at any time by providing all other partners with written notice. However, unless there is a written agreement to the contrary, such retirement does not take effect until six months have passed after the date the notification was issued.

The importance of Section 37 rests in its capacity to control and formally establish the partner retirement process. It gives the remaining partners a reasonable amount of time to get used to the impending change, settle their financial obligations, and, if required, find a suitable replacement.

In the case of Pradeep Arora and Ors. V. Samantha Kochhar[17], the case involved a partnership dispute between five partners, with the respondent claiming a recovery of Rs.24,50,000 invested by the petitioner. The court ruled that the counterclaim was irrelevant and that accounts would have to be rendered. The Supreme Court emphasized that the firm was an unregistered firm, and an individual cannot file a suit against the partner for return of capital contributions.

In the case of Mrs.Halima Bai vs Sparkle-Ads-Firm[18], the appeal against the final application in the Chennai court centered around a partnership firm with four partners, two plaintiffs, and two defendants. The partners contributed Rs.10,000/- towards the share capital. The plaintiff expressed her desire to retire, but the defendant acknowledged her retirement.

The plaintiff argued that the firm failed to settle her accounts post-retirement and demanded to settle all her shares. The court ruled that section 27 of the partnership deed addresses the rights of outgoing partners, and the plaintiff could not claim profits as there was no contribution from her side. The appeal was dismissed, confirming the court's judgment and decree

The Indian Partnership Act's Sections 32 to 38 describe the many circumstances under which a partner may leave a partnership, including retirement, expulsion, insolvency, and death. In order to facilitate a partner's retirement and ensure a just and orderly separation of the partnership when necessary, the Act places a strong emphasis on the necessity of permission, agreement, or notice. Notably, the Act provides particular regulations for each situation, making a distinction between partnerships at will and those with formal agreements.

In summary, the Indian Partnership Act provides a framework for partners in a partnership, ensuring fairness and fairness in business transactions.

  • Indian Partnership Act, � 36 1932
  • Indian Partnership Act, � 32 1932
  • Indian Partnership Act, � 33 1932
  • Indian Partnership Act, � 34 1932
  • Indian Partnership Act, � 35 1932
  • Supra Note 2
  • A.I.R. 1996 Mad. 19
  • A.I.R. 2008 Bom. 187
  • A.I.R. 1988 Bom. 187
  • [1904] 1 Ch 486
  • Sukriti Nigam, "Dissolution Of Partnership Firm and It's Income Tax Liability",  (Last visited on Sept. 29, 2023)
  • See section 42(c)
  • AIR 1959 Raj 140
  • Indian Partnership Act, � 36(1) 1932
  • Indian Partnership Act, � 36(2) 1932
  • Indian Contract Act, � 27 1872
  • A.I.R. 2016 Delhi HC
  • A.I.R. 2014 Madras HC

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