Indian Partnership Act
Incoming and Outgoing Partners: Sections 31 to 36
A firm is a revolving door. Partners come in under Section 31, and go out by retirement (Section 32), expulsion (Section 33), insolvency (Section 34) or death (Section 35). Each time, the firm is reconstituted: the business continues, but the group of partners is new. Section 36 then governs what an outgoing partner may and may not do afterwards. The practical questions are always two: who is liable, and from when, and what notice must be given. This note covers the whole chapter.
The revolving door of a firm, Section 36 after a partner leaves, and a table of liability before and after each event
1. Coming In: Section 31
i. Consent. Subject to contract between the partners and to Section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.
ii. Liability. Subject to Section 30, a person introduced as a partner does not thereby become liable for any act of the firm done before he became a partner.
iii. Taking on old debts requires an agreement with the creditor, that is, novation; an agreement only among the partners binds only them.
2. Going Out: Four Ways
Event | Section | How it happens |
|---|---|---|
Retirement | 32 | With the consent of all the other partners; in accordance with an express agreement; or, where the partnership is at will, by notice in writing to all the other partners |
Expulsion | 33 | Only in the exercise, in good faith, of a power conferred by contract, by the majority the contract specifies |
Insolvency | 34 | A partner adjudicated an insolvent ceases to be a partner on the date of the order, whether or not the firm is thereby dissolved |
Death | 35 | The partner's death; subject to contract, the firm is dissolved under Section 42(c) |
3. Liability: Before, After and Public Notice
Event | Acts before | Acts after | Public notice |
|---|---|---|---|
Admission, s. 31 | Not liable, unless he agrees | Fully liable | Not required |
Retirement, s. 32 | Liable, unless discharged by agreement with the creditor | Liable until public notice is given | Required |
Expulsion, s. 33 | Liable, as on retirement | Liable until public notice is given | Required |
Insolvency, s. 34 | His estate remains liable | His estate is not liable | Not required |
Death, s. 35 | His estate remains liable | His estate is not liable | Not required |
- The dormant partner. A retiring partner who was not known to those dealing with the firm as a partner need not give public notice; the proviso to Section 45 protects him.
- Who may give notice. The outgoing partner or any partner of the reconstituted firm: Section 32(4), applied to expulsion by Section 33(2).
4. Insolvency and Death
§ Sections 34 and 35 • Insolvency, s. 34. Where a partner is adjudicated insolvent, he ceases to be a partner on the date of the order, whether or not the firm is dissolved; and the estate of a partner so adjudicated is not liable for any act of the firm done after that date. • Death, s. 35. Where, under a contract, the firm is not dissolved by the death of a partner, the estate of the deceased partner is not liable for any act of the firm done after his death. • Effect on the firm. Subject to contract, insolvency and death dissolve the firm under Sections 42(c) and 42(d); a deed commonly provides that the firm shall continue. • The estate's claim. The legal representatives may inspect the accounts under Section 12(e), and the estate has the option in Section 37 where accounts remain unsettled. |
5. After Leaving: Section 36
§ What an outgoing partner may and may not do He may carry on a business competing with that of the firm, and he may advertise such business. Subject to contract to the contrary, he may not: use the firm name; represent himself as carrying on the business of the firm; or solicit the custom of persons who were dealing with the firm before he ceased to be a partner. Agreements in restraint. A partner may agree with his partners that on ceasing to be a partner he will not carry on a similar business within a specified period or within specified local limits; notwithstanding Section 27 of the Contract Act, such an agreement is valid if the restrictions are reasonable: Section 36(2). |
6. Two Provisions That Follow
i. Section 37: the outgoing partner's option. Where a partner ceases to be a partner and the surviving or continuing partners carry on the business with the firm's property without a final settlement of accounts, the outgoing partner or his estate is entitled, at his option, to such share of the profits since he ceased to be a partner as is attributable to the use of his share of the property, or to interest at six per cent a year on the amount of his share in the property.
ii. Section 38: continuing guarantee. A continuing guarantee given to a firm, or to a third party in respect of a firm's transactions, is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm.
7. Frequently Asked Questions
Is an incoming partner liable for the firm's past debts?
No, unless he agrees with the creditor by novation; Section 31(2) protects him from acts done before he joined.
When does a retiring partner's liability end?
For past acts, only if he is discharged by agreement with the creditor; for later acts, when public notice of his retirement is given.
Does a partner's death end his estate's liability?
Yes, for acts of the firm done after his death, under Section 35.
Can an outgoing partner compete with the firm?
Yes, but he may not use the firm name, represent himself as carrying on its business or solicit its old customers, and a reasonable restraint agreed with the partners is valid.