Indian Partnership Act
Transfer of a Partner's Interest: Section 29
A partner may sell, mortgage or charge his share in the firm. He does not need anyone's permission to do so, because he is disposing of his own interest. But the buyer does not walk into the partnership. Section 29 gives him money, not membership: while the firm continues he may receive the share of profits and nothing more, and only on dissolution, or when the transferring partner leaves, does he become entitled to a share of the assets with an account from that date. This note explains the position on both sides of that line.
What the transferee gets while the firm continues and after dissolution, the comparison with a partner, and the reason for the rule
1. The Provision
§ Section 29 (1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners. (2) If the firm is dissolved, or if the transferring partner ceases to be a partner, the transferee is entitled, as against the remaining partners, to receive the share of the assets of the firm to which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution. |
2. While the Firm Continues
Right claimed | Position of the transferee |
|---|---|
To take part in, or interfere with, the conduct of the business | No |
To require accounts of the firm | No |
To inspect the books of the firm | No |
To be heard in decisions, or to object to how the business is run | No |
To receive the transferring partner's share of profits | Yes |
To dispute the amount of those profits | No: he must accept the account of profits agreed to by the partners |
To sue for dissolution of the firm | No: dissolution by the court under Section 44 is at the suit of a partner |
- The transferring partner remains a partner. He keeps his rights and duties in the firm, continues to be liable to creditors under Section 25, and continues to owe good faith to his co-partners under Section 9.
3. On Dissolution, or When the Transferring Partner Leaves
§ The doors open • A share of the assets. As against the remaining partners, the transferee may receive the share of the assets to which the transferring partner was entitled. • An account. For the purpose of ascertaining that share, he is entitled to an account as from the date of the dissolution, or from the date the transferring partner ceased to be a partner. • Not a reopening of the past. He cannot go behind the accounts of earlier years; the account runs from that date forward. • Why the change. While the firm ran, the partners' mutual trust had to be protected. Once it ends, there is nothing left but the division of assets, and the transferee's claim can be worked out. |
4. Transfer Compared with Admission as a Partner
Basis | Transferee under Section 29 | Partner admitted under Section 31 |
|---|---|---|
Consent needed | None: the partner disposes of his own interest | The consent of all the partners is required |
Status | A stranger to the firm | A member of the firm |
Management | No right to take part or to be heard | A right to take part, Section 12(a) |
Books and accounts | No access while the firm continues | Full access, Section 12(d) |
Profits | Receives the transferring partner's share, as accounted by the partners | Shares profits in the agreed ratio, Section 13(b) |
Liability to creditors | None | Unlimited, joint and several, for acts after he joins, Sections 25 and 31 |
Good faith | Owes none to the firm | Owes utmost good faith, Section 9 |
5. Why the Law Is Restrictive
i. Personal confidence. Partnership rests on mutual trust; no partner should find himself in business with a stranger chosen by someone else.
ii. Consistency with Section 31. If a transferee could walk in, the requirement of unanimous consent for admitting a partner would be meaningless.
iii. Protection for the buyer, too. He gets a money claim without the unlimited liability that a partner carries.
iv. A caution for lenders. A charge on a partner's share is weak security while the firm continues: it yields only what the partners account for as profits.
6. Frequently Asked Questions
Can a partner transfer his share without the consent of the others?
Yes. He may transfer his own interest, but the transferee gets only the rights in Section 29 and does not become a partner.
Can the transferee inspect the books of the firm?
Not while the firm continues. After dissolution, or when the transferring partner ceases to be a partner, he is entitled to an account from that date.
Must the transferee accept the partners' account of profits?
Yes, while the firm continues, under Section 29(1).
Can a transferee sue for dissolution of the firm?
No. A suit for dissolution under Section 44 lies at the instance of a partner.