Incoming and Outgoing Partners | Law of Contracts - CLAT PG PDF Download

 Reconstitution of a Firm (Incoming and Outgoing Partners) 

The reconstitution of a firm occurs when there is a change in the composition of the partnership. Chapter V (Section 31 to 38) of the Indian Partnership Act outlines the provisions related to incoming and outgoing partners.

 1. Introduction of a Partner [Section 31] 

• A person may be admitted as a partner either with the consent of all the partners or in accordance with a contract between the existing partners, subject to the provisions of Section 30 regarding minor partners.
•  Example:  If the partnership agreement between X and Y allows X to introduce any of his sons as a partner upon reaching the age of majority, and X decides to admit his son, Y's consent is not required because the agreement stipulates consent.

 Liability of an Incoming Partner for Firm's Acts Done Before Admission 

• An incoming partner is generally not liable for the acts of the firm done before their admission. However, there are exceptions to this rule:
•  (a)  An incoming partner is liable for acts done before their admission if the new firm assumes the liabilities of the old firm, and the creditors accept the new firm as their debtor, discharging the old firm from its liabilities.
•  (b)  A minor who decides to become a partner upon attaining majority is liable for all acts of the firm done since they were admitted to the benefits of partnership.
•  (c)  A minor admitted to the benefits of partnership who later becomes a partner (as per Section 30).

 Liability of an Incoming Partner for Firm's Acts Done After Admission 

An incoming partner is liable for all the acts of the firm done after his admission.

 Outgoing Partners 

 Retirement of a Partner [Section 32] 

• A partner may retire from the firm in any of the following ways:
•  (i)  With the consent of all the other partners;
•  (ii)  In accordance with an express agreement among the partners;
•  (iii)  In the case of partnership at will, by giving notice to all other partners of his intention to retire. In partnership at will, a partner can retire by notice even if pending contracts are not completed. [Keshav Lai v. Bhai Lai]

 Liabilities of a Retiring Partner 

•  (a) For Firm's Acts Before Retirement [Section 32(2)]  : A retiring partner remains liable to third parties for the firm's acts done before his retirement unless he is discharged from this liability through a tripartite agreement involving himself, the third party, and the partners of the reconstituted firm.
•  (b) For Firm's Acts After Retirement [Section 32(3), (4)]  : A retiring partner is liable to third parties for the firm's acts after his retirement (except for those who deal with the firm without knowledge of his partnership) until public notice of his retirement is given. This notice can be provided by the retiring partner or any of the other partners. This liability is based on the principle of holding out (Sec. 28).

 Rights of a Retiring Partner (Section 36 and 37) 

 (a) Right to Carry on Competing Business [Section 36] 

• A retiring partner has the right to start a competing business and advertise it. However, unless agreed otherwise, they cannot:
•  (i)  Use the firm's name.
•  (ii)  Claim to be running the firm's business.
•  (iii)  Solicit the firm's former customers.

 (b) Right in Case of No Final Settlement of Accounts [Section 37] 

• A retiring partner can claim either:
•  (i)  Profits earned after retirement that are due to the use of their share of the firm's property, or
•  (ii)  Interest at 6% per annum on their share of the property.
• This right applies even if only a part of their property is used in the business.
• Legal representatives of a deceased partner also have this right.

 3. Expulsion of a Partner [Section 33] 

• A partner may be expelled from the partnership under the following conditions:
• (a) The contract between the partners must explicitly grant the power to expel a partner.
• (b) The decision to expel must be made by a majority of the partners.
• (c) The expulsion must be carried out in good faith, without any personal animosity.
• (d) The affected partner should be given an opportunity to present their case before the expulsion.
• If these conditions are not met, the expulsion is considered irregular and void.
• A partner who is wrongfully expelled has the right to be reinstated as a partner, rather than seeking damages for the wrongful expulsion.
• The rights and liabilities of an expelled partner are similar to those of a retired partner.

 4. Insolvency of a Partner [Section 34] 

• The insolvency of a partner has the following effects:
• (a) The partner ceases to be a member of the partnership from the date of the adjudication order.
• (b) Unless otherwise agreed, the partnership is dissolved.
• (c) The partner's estate is not liable for the firm's actions occurring after the date of the adjudication order.
• (d) The firm is not liable for the partner's actions taken after the date of the adjudication order.
• There is no need for public notice regarding the insolvency of a partner.

 5. Death of a Partner [Sections 35 and 42(c)] 

• Unless the partners agree otherwise, the death of a partner leads to the dissolution of the firm.
• If the partnership agreement states that the firm continues despite a partner's death, the deceased partner's estate is not responsible for any actions of the firm that occur after their death.
• Public notice is not required when a partner passes away.
• For example, if a partner named X was part of a firm that ordered goods during X's lifetime but the delivery happened after X's death, X's estate would not be liable for this debt. This is because there was no debt related to those goods during X's lifetime.

 6. Rights of Transferee of a Partner's Share [Section 29] 

• A partner can transfer their interest in the firm through sale, mortgage, or charge, either fully or partially. The rights of the transferee are as follows:
•  (a) During the Continuance of the Partnership:  The transferee is entitled to receive the share of profits and the account of profits agreed upon by the partners. However, they do not have the right to:
•  (i)  Interfere with the conduct of the business.
•  (ii)  Inquire about accounts.
•  (iii)  Inspect the firm's books.
•  (b) On Dissolution of Firm or Retirement of the Transferring Partner:  The transferee is entitled to receive the share of assets of the transferring partner and an account from the date of dissolution to determine the share.
•  Sub-partnership:  A sub-partnership occurs when a partner of a firm agrees to share their share in the firm with a non-partner. In the case of Venkatratnam v. Venkatratnum, it was assumed that a sub-partner is considered a transferee as per Section 29. Therefore, the rights of a sub-partner are the same as those of a transferee of a partner's share under Section 29.

 7. Effect of Change in the Constitution of the Firm on Continuing Guarantee [Section 38] 

 A continuing guarantee  is one that applies to a series of transactions. Unless the partners agree otherwise, a continuing guarantee given to a firm or a third party regarding the firm's transactions is revoked for future transactions from the date of any change in the firm's constitution.

 8. Rights and Duties of Partners after Change in the Firm [Section 17] 

• The rights and duties of partners in a reconstituted firm remain the same as they were before the change.
• Section 17 outlines three types of changes in the firm:
•  (a) Change in the Constitution of the Firm [Section 17(a)]:  This involves a modification in the agreement or terms governing the partnership.
•  (b) Continuation of the Firm after the Expiry of the Term [Section 17(b)]:  This refers to the situation where the firm continues its operations even after the initial agreed term has ended.
•  (c) Carrying on an Additional Undertaking [Section 17(c)]:  This involves the firm taking on new activities or responsibilities in addition to its original purpose.