Admission and Outgoing of Partners: Explained with Relevant Provisions
Admission and Outgoing of Partners | Overview Introduction Admission of Partners Outgoing of Partners Conclusion The article specifically deals with the concept of admission and outgoing of partners as mentioned under the Indian Partnership Act. It further separately discusses the rights and liabilities of incoming and outgoing partners as per the statute. The present article discusses the two… Read More »
Admission and Outgoing of Partners | Overview Introduction Admission of Partners Outgoing of Partners Conclusion The article specifically deals with the concept of admission and outgoing of partners as mentioned under the Indian Partnership Act. It further separately discusses the rights and liabilities of incoming and outgoing partners as per the statute. The present article discusses the two main types of partners and their characteristics in detail with the help of relevant...
Admission and Outgoing of Partners | Overview
The article specifically deals with the concept of admission and outgoing of partners as mentioned under the Indian Partnership Act. It further separately discusses the rights and liabilities of incoming and outgoing partners as per the statute.
The present article discusses the two main types of partners and their characteristics in detail with the help of relevant statutory provisions. To discuss so, the author has divided the article into three major sections; the first one is an introductory section on the concept of admission and outgoing of partners, then the second section specifically deals with the concept of admission of partners, and similarly, the third section provides the concept of outgoing partners. The article has a suitable conclusion in the end.
I. Introduction
The partnership agreement as a contract between partners in a partnership sets out the terms and conditions governing the relationship between the partners. The concept of partnership as a contract has been elucidated with the definition under section 4 of the Indian Partnership Act, 1932. The concerned provision provides that a partnership can be defined as a voluntary contract entered between two or more competent persons who collectively invest their money, labour, capital, skill, or some or all of them in a legal business with a mutual understanding that there shall be sharing of profit gained through the conduct of the business.
There are two basic kinds of partners that define the types of partners in a partnership firm: Incoming and Outgoing partners. However, these two types of partners are not a restricted demarcation on the types of partners in a firm because there may be some other general categories to differentiate between types of partners. Nevertheless, the two important types of partners which have a specific place in the Partnership act and are also today’s point of discussion is incoming and outgoing partners.
In partnership, whenever there is an admission or introduction of a new partner or retirement of a partner or expulsion or insolvency of a partner, the partnership firm happens to undergo reconstitution. The admission or incoming and outgoing of partners in a partnership firm is dealt with from Section 31 to section 35 of the Indian Partnership Act, 1932. The mentioned sections provide provisions explaining the legal consequences of a partner coming in or going out of the firm.
To have a detailed understanding of the concept, let us take a separate look at the meaning and characteristics of incoming and outgoing partners in a partnership firm. So, without further ado, let’s dive in:
II. Admission of Partners
Admission of a partner means the introduction of a new partner to the partnership firm. It is also known as an incoming of a partner. An incoming partner is the one who joins a partnership firm by contract agreement or is added to the firm. The incoming partners are all the partners who have recently got admitted to the firm. Such admission of partners is subject to any procedure or method that a partnership firm at its will and understanding adopts for the inclusion of new members.
The rules regarding the admission of new members into the firm are enshrined under section 31(3) of the act.[1]It is imperative to note here that the first rule regarding the inclusion of partners is that admission of a new partner to the firm can be done only with the consent of all the existing partners. The second rule is that once a member is admitted as a partner to the firm then he/she shall only be jointly liable to the acts of the firm that have taken place from the date they have joined the firm.
The definition of incoming partners as given by Pollock and Mulla is as provided below:
“Where a person nominated is not acceptable to the other partners, the court cannot force them into to enter into a partnership with him because the foundation of partnership is mutual confidence, which the court cannot supply where it doesn’t exist.”[2]
Therefore, it can be inferred that the legal liability of any new member in a partnership firm begins only after he is admitted to the firm and not prior to his admission.
Rights and Liabilities of Incoming Partner
A person who is admitted as a partner into an existing partnership firm doesn’t thereby become liable to the creditors of the firm for anything done or omitted before he was admitted as a partner of the firm. Once a person is admitted as a partner of the firm he becomes liable for all the debts and acts of the firm only from the date of his admission as a partner, he can’t be held liable for the acts of the old partnership firm. The concerned newly admitted partner will be liable to its co-partners only.
It is crucial to note that the consent of creditors is significant to make the transaction operative. In a contract agreement, the technical term for substituted liability is Novation. Hence, a mere contract agreement amongst the partners can’t operate as novation unless the creditors give their consent.
III. Outgoing of Partners
A partner of a partnership firm who is going to leave that firm purposely or to he/she might be died or expelled by a firm are referred as outgoing partners. The provision for outgoing partners and its process is dealt with under section 32 to section 38 of the Indian Partnership Act, 1932. The provisions provide for different ways in which a partner may become an outgoing partner of the firm with his/her respective rights and liabilities.
Rights of Outgoing Partners
To carry on Competing Business
It is the right of an outgoing partner to carry on competing for business[3] and that when he has left the firm he can freely start or even begin to advertise any other business or firm that is in competition to his ex-firm. However, if there’s not an express contract to the contrary, there are certain restrictions on an outgoing partner to either use the name of the ex-firm or even misrepresent him as an existing partner of the firm. An ex-partner of the firm can’t solicit customers or clients from his previous firm while he was still a partner there.
Moreover, there is another underlying rule on the outgoing partner’s right to carry on competing business is the result of the existence of an express contract agreement which is restricting the outgoing partner from executing any business activity which is similar to the ex-firm within specified reasonable local limit and time. Such a contract agreement restricting the rights of the outgoing partners is tested on the basis of its reasonability. Therefore, it can be said that the test of the reasonability clause of this right of outgoing partners is an exception to Section 27 of the Indian contract Act which renders any contract in restraint of trade void.
Ceases to share subsequent profit
The provision on when the right of an outgoing partner to share subsequent profits ceases is mentioned under Section 37 of the Partnership Act, 1932. When a member of the partnership firm dies and becomes an outgoing partner or leaves the firm due to certain reason and the firm he left continues to exist and function, then such person who left the firm or his estate through his legal representatives are entitled to shares and profits gained by the firm after he has left the firm. [4]
The sharing of shares and profits shall be done in two ways:
- Either attributable to the use of his share of the property in the firm; or
- 6% per annum interest on his share of profit of the firm.
However, the above-mentioned ways are applicable only in situations when there’s no final settlement of accounts between the partners of the partnership firm. In cases where the partnership firm purchases the remaining interests of the outgoing partner then the concerned outgoing partner will no longer be entitled to receive any share or the profits from the firm.
The Hon’ble Supreme Court in the case of Addanki Narayanappa and Ors. v. Bhaskara Krishnappa and Ors[5]asserted the allocation of profits of the firm under section 37 of the statute to the heirs or estate of a deceased partner. However, any contractual agreement to the contrary is subject to this benefit-sharing and in a situation where the company acquires the remaining interests of the outgoing partner then that partner shall not be further eligible to enjoy any profit-sharing rights.
Liabilities of Outgoing Partners
Retirement of a partner:
Section 32 of the act has the provision to deal with the retirement of a partner. It says that a partner may retire under the following circumstances[6]:
- By receiving the consent of all other member partners
- With an express agreement of all partners
- When the partnership is at will.
In case of partnership by will, the concerned partner may retire by giving prior notice of retirement disclosing his intention to get retirement to its co-partners. Moreover, the retiring partner in no situation or case gets off the liabilities for the acts committed by him on behalf of the firm when he was an existing partner there and he continues to be liable for the acts of the firm until he shows up with a public notice. There is no compulsion that the notice has to be served only by the retiring partner, other partners in the firm can also send out the public notice regarding the retirement of the concerned partner.
Once the partner is retired, he gets discharged from all the legal liabilities towards the third party through a contract agreement between him, other partners, and the third party stating the same. In cases of when there is no such contract agreement, there exists an implied notion for the same if the third party is already aware of the retirement but even then went ahead to deal with the reconstituted partnership firm.
Expulsion of a partner
Section 33 of the Indian Partnership Act, 1932 enshrines provision for the expulsion of a partner. It states that a partner can be expelled from the partnership firm only in the presence of a pre-decided procedure decided through an express contract agreement. For such a situation the majority of the member partners must agree to the expulsion of that particular partner. It is to note that the expulsion of a partner must be done by the other partners in the exercise of good faith only. The test for the exercise of good faith is as follows:
- The expulsion done shall be in the interest of the partnership firm.
- A due expulsion notice must be served to the partner prior to expulsion.
- The concerned partner must be given an opportunity to justify his questionable acts that led to his expulsion.
If all the aforementioned conditions are not met there shall be no expulsion of any partners from the firm. The expelled partners must be treated as retired partners under Section 32 of the act.
Insolvency
If any of the partners becomes insolvent that it is not able to pay debts owed it becomes an outgoing partner of the firm, and hence, he ceases to be a member of the firm from the date at which he has been adjudicated insolvent under a court order.[7] In cases when the insolvency of a partner doesn’t ipso facto leads to the firm’s dissolution, the liabilities of the insolvent partner towards the partnership firm change, and the firm exists as it was earlier, excluding the insolvent partner. The partnership firm is not liable for any of the acts done by the insolvent partner.
Liability of Estate of Deceased Partner
The general rule says that a partner in a partnership firm leads to a firm’s dissolution but there is an exception to this rule here. It is the existence of an expressed contract stating otherwise. The estate of the deceased partner is liable to the firm only to the extent done for the firm during the lifetime of the deceased and he would not be made liable for the acts done by the firm after the death of the deceased partner. In such a situation, there is no right to arise the liability of the estate of the deceased partner.[8]
IV. Conclusion
In a partnership contract agreement, the firm carries on its business activity when two or more persons come together to perform certain rights and obligations towards each other and have certain liabilities and responsibilities towards each partner and towards the firm. There may arise certain situations when the existing member partners might want to leave the partnership firm or when some new member wants to get admitted to the firm. The Indian Partnership Act, 1932 specifies various ways of admission of new members to the firm, situations when an old partner leaves the firm, and the change in their rights and liabilities after being an ex-member of the firm.
[1] The Indian Partnership Act, 1932, sec 31(3).
[2] Pollock, Mulla, The Indian Partnership Act, LexisNexis Butterworths, 8th edn. 2019.
[3] The Indian Partnership Act, 1932, sec 36.
[4] The Indian Partnership Act, 1932, sec 37.
[5] 1966 AIR 1300.
[6] The Indian Partnership Act, 1932, sec 32.
[7] The Indian Partnership Act, 1932, sec 34.
[8] The Indian Partnership Act, 1932, sec 35.