Indian Partnership Act
Retirement of a Partner: Section 32
A partner may leave a firm in three ways: with the consent of all the other partners, under an express agreement, or, where the firm is at will, by notice in writing. Leaving is the easy part. The difficult part is liability. For acts done before he retires, he stays liable unless the creditor agrees to discharge him. For acts done after, he remains liable to the world until public notice is given. This note takes retirement from the door to the settlement of accounts.
The three doors out, the tail of liability until public notice, old and new liabilities, and what the retiring partner gets
1. The Three Routes: Section 32(1)
Route | Requirement | Where it is used |
|---|---|---|
(a) Consent | With the consent of all the other partners | Any firm, whatever its duration |
(b) Express agreement | In accordance with an express agreement by the partners | Where the deed provides for retirement on notice, at an age, or on stated events |
(c) Notice | Where the partnership is AT WILL, by notice in writing to all the other partners of his intention to retire | Only in a partnership at will |
- Retirement is not dissolution. A notice under Section 32(1)(c) says the partner is leaving; a notice under Section 43 says the firm is to end. Read the notice carefully: its language decides which it is.
2. Liability for Acts Before Retirement: Section 32(2)
§ Discharge requires the creditor The rule. A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm. Implied agreement. Such an agreement may be implied by a course of dealing between the third party and the reconstituted firm after he had knowledge of the retirement. Between the partners. An indemnity given to the retiring partner by the continuing partners is useful, but it does not bind the creditor. In short: this is novation, with the creditor as a necessary party. |
3. Liability for Acts After Retirement: Section 32(3) and (4)
§ The tail, and how to cut it • The rule. Notwithstanding the retirement, the retired partner and the other partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement. • The proviso. A retired partner is not liable to any third party who deals with the firm without knowing that he was a partner. This protects the dormant partner. • Who may give notice, s. 32(4). The retired partner or any partner of the reconstituted firm. • How, s. 72. Public notice is given in the manner prescribed: notice to the Registrar of Firms where the firm is registered, and publication in the Official Gazette and in a local vernacular newspaper circulating in the district where the firm has its place of business. • In practice. Also write to the firm's bankers and regular customers, and have the change recorded under Section 63. |
4. The Rights of the Retiring Partner
Right | Content |
|---|---|
Settlement of accounts | His capital, advances and share of profits up to retirement, as the deed provides, and his share in the firm's property valued as agreed |
Section 37 option | Where the business is carried on with the firm's property without a final settlement, he may claim the share of subsequent profits attributable to his share, or interest at six per cent a year on the amount of his share |
Section 36 freedom | He may carry on a competing business and advertise it, but may not use the firm name, represent himself as carrying on its business, or solicit its old customers |
Reasonable restraints | Any restraint agreed with the partners is valid if reasonable as to period and place: Section 36(2) |
5. Retirement, Dissolution and the Two-Partner Firm
i. Retirement removes one partner; the firm is reconstituted and the business goes on.
ii. Dissolution ends the firm itself, and its affairs are wound up under Sections 46 to 55.
iii. A firm of two. When one of two partners retires, only one person is left, and there cannot be a firm of one; the firm is therefore dissolved, and the accounts are settled accordingly.
iv. Drafting point. In a two-partner firm, a clause providing for the purchase of the outgoing partner's share and the continuation of the business by the survivor with a new partner avoids disputes.
6. Frequently Asked Questions
How can a partner retire from a firm?
With the consent of all the other partners, in accordance with an express agreement, or, where the firm is at will, by notice in writing to all the other partners.
Is a retired partner liable for the firm's old debts?
Yes, unless he is discharged by an agreement with the creditor and the partners of the reconstituted firm, which may be implied by a course of dealing.
Until when is a retired partner liable for new debts?
Until public notice of his retirement is given; but he is not liable to a person who deals with the firm without knowing he was a partner.
What happens if one of two partners retires?
The firm is dissolved, because a firm cannot consist of one person.