Indian Partnership Act
Reconstitution of a Partnership Firm
When a partner joins or leaves, the firm is reconstituted: the same business carries on under the same name, with a different set of partners. The Act does not use the word in a definition, but it uses the idea throughout, in the phrase 'change in the constitution of the firm'. Reconstitution is not dissolution: nothing is wound up, and the business is not interrupted. What changes is the composition of the firm and, with it, the pattern of liability going forward. This note explains the concept and its effects.
The firm before and after a change, what continues and what changes, and reconstitution against dissolution
1. What Reconstitution Means
§ The idea • Definition in practice. A change in the composition of a firm which leaves the firm in existence and its business continuing. • The statutory phrase. 'A change in the constitution of the firm' appears in Sections 17(a), 38, 63 and elsewhere. • Not a new firm. The business, premises, name, licences and customers continue; only the aggregate of partners is different. • Not dissolution. There is no winding up under Sections 46 to 55; accounts are settled with the outgoing partner alone. |
2. The Occasions of Reconstitution
Event | Section | Note |
|---|---|---|
Admission of a partner | 31 | With the consent of all the existing partners, subject to contract |
Retirement of a partner | 32 | With consent, under an express agreement, or by notice where the firm is at will |
Expulsion of a partner | 33 | Only under a power in the contract, exercised by a majority in good faith |
Insolvency of a partner | 34 | He ceases to be a partner on adjudication; the firm continues if the contract so provides |
Death of a partner | 35 | Where the contract provides that the firm shall not be dissolved by death |
A minor electing to become a partner | 30 | On his election, or on the expiry of the six months |
Change in shares or in the business itself | 11, 12(c) | A change in profit-sharing needs the consent of all; a change in the nature of the business needs unanimity |
3. What Continues, and What Changes
Aspect | Position on reconstitution |
|---|---|
The business | Continues without interruption |
The firm name and goodwill | Continue, if the partners keep the name |
Property of the firm | Continues to be held for the purposes of the business under Section 14; no transfer takes place merely because the partners change |
Existing contracts | Are performed by the reconstituted firm; the rights and obligations continue, subject to any term in the contract itself |
Mutual rights and duties | Remain as before the change, as far as may be, under Section 17(a), subject to contract |
Liability of an incoming partner | Not liable for acts before he joined, unless there is novation: Section 31(2) |
Liability of an outgoing partner | Continues for past acts unless discharged, and for later acts until public notice: Sections 32(2) and (3), 33(2) |
Continuing guarantees | Revoked as to future transactions from the date of the change, in the absence of agreement to the contrary: Section 38 |
Registration | The change must be recorded with the Registrar under Section 63 where the firm is registered |
4. Reconstitution and Dissolution
Basis | Reconstitution | Dissolution |
|---|---|---|
The firm | Continues, with a changed composition | Comes to an end: Section 39 |
The business | Carried on | Wound up, unless sold as a going concern |
Accounts | Settled with the outgoing partner; the Section 37 option applies meanwhile | Full settlement of accounts under Section 48 |
Assets | Remain with the firm | Realised and applied in the statutory order |
Notice | Public notice of retirement or expulsion under Section 72 | Public notice of dissolution under Section 45 |
Registration | Change recorded under Section 63 | Dissolution recorded under Section 63(1) |
- The vocabulary of Section 39. The dissolution of the partnership between all the partners is called the dissolution of the firm. Where the tie ends between some partners only, and the firm continues, it is a dissolution of partnership, that is, a reconstitution.
5. Practical Steps on a Reconstitution
i. A supplementary deed recording the change, the new shares, capital and duties.
ii. Settlement of the outgoing partner's account, or an agreed basis for it.
iii. Public notice under Section 72 where a partner retires or is expelled.
iv. Intimation to the Registrar under Section 63, so that the register shows who the partners are.
v. Bank, tax and GST records updated; fresh guarantees where the bank requires them; the revised deed filed with the return of income.
6. Frequently Asked Questions
What is reconstitution of a firm?
A change in the composition of the firm, by admission, retirement, expulsion, insolvency or death, where the firm continues and the business is carried on.
Is a reconstituted firm a new firm?
No. The same business continues; only the aggregate of partners changes, and the deed and register are brought up to date.
Does reconstitution affect the firm's property?
No transfer takes place merely because the partners change; the property continues to be held for the purposes of the business under Section 14.
What is the difference between dissolution of partnership and dissolution of the firm?
Dissolution of partnership ends the tie between some partners, with the firm continuing; dissolution of the firm ends it between all the partners, and the affairs are wound up.