Indian Partnership Act
Insolvency, Death and Outgoing Partners: Sections 34 to 38
A partner may leave without choosing to: by being adjudicated insolvent, or by dying. Sections 34 and 35 fix the date from which his estate stops answering for the firm. Sections 36 and 37 then deal with what an outgoing partner, or a deceased partner's estate, may do and may claim afterwards: the freedom to compete, with limits; and the option of a share of subsequent profits or six per cent interest where accounts remain unsettled. Section 38 adds a rule on continuing guarantees. This note covers all five.
Insolvency, death and guarantees, the Section 37 option between profits and interest, the proviso, and what an outgoing partner may do next
1. Insolvency of a Partner: Section 34
§ Two rules (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. (2) Where, under a contract between the partners, the firm is not dissolved by the adjudication, then the estate of the partner so adjudicated is not liable for any act of the firm done after the date of the order, and the firm is not liable for any act of the insolvent done after that date. No public notice needed. The cessation operates by force of the section, so the ordinary rule requiring public notice does not apply. Effect on the firm. Subject to contract, insolvency dissolves the firm under Section 42(d); many deeds provide that the firm shall continue. |
2. Death of a Partner: Section 35
i. The rule. Where, under a contract between the partners, 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.
ii. Without such a contract, the firm is dissolved by death, subject to contract: Section 42(c).
iii. No public notice. As with insolvency, none is required; the estate's liability ends on the date of death.
iv. The estate's rights. The legal representatives may inspect and copy the accounts under Section 12(e), and may claim under Section 37 where accounts remain unsettled.
3. Rights of an Outgoing Partner to Compete: Section 36
Position | Content |
|---|---|
What he may do, s. 36(1) | Carry on a business competing with that of the firm, and advertise such business |
What he may not do | Subject to contract to the contrary: 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 |
Use of his own name | He may ordinarily trade under his own name, so long as he does not represent that he is carrying on the business of the old firm or pass his business off as that firm's |
Agreements in restraint, s. 36(2) | A partner may agree that on ceasing to be a partner he will not carry on a business similar to that of the firm within a specified period or within specified local limits; notwithstanding Section 27 of the Contract Act, such an agreement is VALID if the restrictions imposed are REASONABLE |
§ Testing reasonableness • The trade. Is the restrained activity the same as, or genuinely competitive with, the firm's business? • The place. Are the local limits no wider than the firm's area of business and connection? • The period. Is the time no longer than is needed to protect the firm's goodwill? • The consideration. Was the partner paid for the goodwill or otherwise compensated? • The purpose. A restraint that protects goodwill is valid; one that merely stifles competition is not. |
4. The Outgoing Partner's Option: Section 37
§ When it arises, and what it gives When. Where a partner has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business with the property of the firm without any final settlement of accounts. The option, in the absence of a contract to the contrary. At his option, or that of his representatives: either such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm, or interest at six per cent a year on the amount of his share in the property of the firm. Why an option. A share of profits is better where the business has prospered; interest is certain and needs no proof of profits where it has not. |
§ The proviso: an option to purchase Where, by contract, the surviving or continuing partners have an option to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate or the outgoing partner is not entitled to any further or other share of profits. But if a partner assuming to act in exercise of the option does not in all material respects comply with its terms, he is liable to account under the main provision. |
5. Continuing Guarantee: Section 38
i. The rule. A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in the absence of an agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm.
ii. Why. The guarantor's risk was assessed on the partners as they then stood; a change alters what he guaranteed.
iii. Past transactions remain covered; only future ones fall outside.
iv. Practice. Banks routinely take fresh guarantees whenever a firm's constitution changes, and deeds often contain an agreement to the contrary.
6. Frequently Asked Questions
From when does an insolvent partner cease to be a partner?
From the date of the order of adjudication, whether or not the firm is thereby dissolved: Section 34(1).
Is the estate of a deceased partner liable for the firm's later debts?
No. Under Section 35, where the firm continues, the estate is not liable for acts done after his death.
Can an outgoing partner solicit the firm's old customers?
No, unless the contract permits it. He may compete and advertise, but may not use the firm name, represent himself as carrying on its business, or solicit its old customers.
What is the outgoing partner's option under Section 37?
Where the business continues with the firm's property without a final settlement, he may claim a share of the subsequent profits attributable to his share, or interest at six per cent a year on the amount of his share.