Indian Partnership Act
Introduction of a Partner: Section 31
Bringing in a new partner is not like hiring a manager. Because every partner can bind the others and answer for their acts, the law insists on the consent of all before anyone joins, and protects the newcomer from the past by providing that he is not liable for acts done before he became a partner. Where the parties want him to take on old debts, they must go to the creditor and arrange a novation. This note explains both limbs of Section 31 and what admission changes for the firm.
The line of liability at the date of admission, Section 31 in two parts, novation, and what admission changes
1. The Provision
§ Section 31 (1) Subject to contract between the partners and to the provisions of Section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners. (2) Subject to the provisions of Section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner. |
2. Consent of All the Existing Partners
§ Points on sub-section (1) • Why unanimity. Partnership rests on mutual trust and mutual agency; no partner should be compelled into that relation with a person he did not choose. • Subject to contract. The deed may provide otherwise, for example that a new partner may be admitted by a majority, or that a partner's son or nominee may be admitted on his death or retirement. • Subject to Section 30. A minor admitted to the benefits, who later elects or is deemed to become a partner, comes in under Section 30, not by fresh consent. • Not a transfer. A partner cannot bring someone in by selling his share: Section 29 gives a transferee profits, not membership. • Form. Consent may be express or implied from conduct; a supplementary deed should record the admission and its terms. |
3. Liability of the Incoming Partner
Period | Position of the incoming partner |
|---|---|
Acts of the firm before he joined | Not liable, under Section 31(2), even though he is now a partner and the firm's name and business continue |
Acts of the firm after he joined | Liable jointly and severally with the others, under Section 25 |
Where he agrees with the partners to bear past debts | That agreement binds the partners between themselves; the creditor is not affected by it |
Where the creditor agrees to accept the new firm | Novation: the old obligation is substituted, and the incoming partner becomes liable to the creditor |
Where the firm's business is continued and old creditors deal with the new firm | Novation may be implied from the course of dealing, on the ordinary principles of the Contract Act |
§ Novation, in short Three parties are needed: the creditor, the old firm and the reconstituted firm. The effect: the old debt is discharged and replaced by a new obligation of the new firm, which includes the incoming partner. The counterpart: Section 32(2) uses the same idea to discharge a retiring partner from past liability, and such an agreement may be implied by a course of dealing with the reconstituted firm. |
4. What Admission Changes
i. Reconstitution. The business continues, but the firm is a new aggregate of partners; Section 17(a) keeps the mutual rights and duties as before, as far as may be, subject to contract.
ii. Records. A fresh or supplementary deed should record the new partner's capital, share, duties and remuneration; where the firm is registered, the change must be recorded under Section 63.
iii. Guarantees. A continuing guarantee given to or by the firm is revoked as to future transactions from the date of the change: Section 38.
iv. Tax. For a firm to claim deduction of interest and remuneration, the revised deed specifying the partners' shares must be in place.
5. Incoming Partner and Minor Compared
Basis | Incoming partner, s. 31 | Minor admitted to benefits, s. 30 |
|---|---|---|
Consent | Of all the existing partners | Of all the partners for the time being |
Status | A full partner | Entitled to benefits only |
Liability | Personal, for acts after he joins | None personally; only his share is liable |
Past acts | Not liable, s. 31(2) | On becoming a partner, liable for acts since his ADMISSION TO THE BENEFITS |
Rights | Full rights of a partner | Share of property and profits; access to the accounts |
6. Frequently Asked Questions
Can a new partner be admitted without the consent of all?
Only if the partnership contract so provides; otherwise Section 31(1) requires the consent of all the existing partners.
Is an incoming partner liable for debts incurred before he joined?
No, under Section 31(2), unless the creditor agrees to a novation substituting the new firm for the old.
Does admitting a partner dissolve the firm?
No. The firm is reconstituted and the business continues; the mutual rights and duties continue as before under Section 17(a), subject to contract.
What happens to guarantees when a partner is admitted?
A continuing guarantee is revoked as to future transactions from the date of the change, in the absence of agreement to the contrary: Section 38.