Retirement and Expulsion of a Partner

Under the Indian Partnership Act of 1932, expulsion and retirement are two significant modes through which a partner might depart from a partnership. Let's delve into the important aspects of these modes within the framework of the Act.

Retirement

Retirement refers to when a person usually stops working or withdraws from his job due to reaching a particular age. In the case of a partnership, the situation when a partner leaves or departs from a partnership firm is called retirement. The Indian Partnership Act under section 32 deals with the same.

Section 32(1) of the Indian Partnership Act, 1932 states the modes in which a partner might retire from a firm. Three modes for retirement expressed in the Partnership Act are as follows :

• A partner retires from the firm with the approval of other partners. The said consent of all the partners may be express or implied.
• The retiring partner might do the same according to an agreement existing between the partners.
• The partner of a partnership at will might retire by giving a notice about his retirement to the other partners.

Rights of Retiring Partners 

Right to carry a business of a competitive nature (Section 36):- A retiring partner possesses the right to carry a similar and competitive business. The partner might also advertise such business provided he does not utilize the name of the firm, represent himself as doing business of the firm or solicit anyone who before his leaving the partnership was involved in the business.

Right to claim profits after his retirement (Section 37):- A partner who retires has the right to claim profits or 6% interest on the retiring partner’s share of the firm’s assets which the firm earned after his retirement. This applies to situations when the firm continues with the business activities without settling the accounts on such retirement.

Liability of Retiring Partners 

Liability before the partner retires:-

In a case, where a partner retires, he shall continue to be liable and accountable for all of the acts which such partner undertook during his tenure as a partner of the partnership. According to section 32(2) of the Partnership Act, such a person might also be released from his liabilities towards a third party.

The liability might be released when there exists an express or implied agreement between the existing partners and the third party. An implied agreement as mentioned above means implied from the business interactions of the third party to the newly constituted firm after such retirement. 

Liability after the partner retires:-

According to section 32(3) of the Partnership Act, A retired partner shall continue to be accountable to the third parties for all acts of the remaining partners, until a notice for such retirement is communicated to the public. Without such notice the retired even after his retirement continues to be liable as a partner.

According to section 32(4) of the Partnership Act, the notice about such retirement might be given by either the retired partner or by the other existing partners of the firm. Even if a partner is a sleeping or dormant partner, their liability does not cease automatically upon retirement. The retiring partner, whether active or dormant, remains liable for the acts of the partnership until proper notice of retirement is given to the public. A sleeping partner or a dormant partner is such a partner whose existence as a partner is not known to third parties or outsiders to the partnership.

Under Section 32(3) of the Indian Partnership Act, a retired partner continues to be liable until public notice is given of his retirement and what the public notice under the Act is specified by Section 72. Therefore, on a reading of both sections, it is clear that a retiring partner will be liable for any subsequent act on behalf of the firm which would bind the firm until the public notice as prescribed by section 72 is given. [Harihar Davey v. Kamlesh Steel Enterprises, I (2006) BC 193]

Expulsion

Expulsion in general refers to the situation when a person forcefully removes a person from an organization. The law relating to a partner's expulsion has been discussed in section 33 of the Indian Partnership Act, 1932. For a partnership to expel a partner, a simple majority of partners is not sufficient, the power to expel must be exercised in good faith.

Liabilities of the expelled partner: An expelled partner according to section 33(2) of the Partnership Act will have the same liabilities as that of a retired partner. The expelled partner, therefore shall be accountable to third parties for all acts undertaken as a partner before his expulsion and shall also continue to be accountable until and unless a public notice of such expulsion was communicated. The liabilities as expressed in section 32 of the Indian Partnership Act, 1932 shall be applicable even in the case of expelled partners

Meraj Yusha v. Hamida Khatoon (2023), the Calcutta High Court said,

“Expulsion is the final step which can be taken against an erring partner from which there is no return. The majority partners must hence show utmost good faith before taking that step.”

References

[1] Indian Partnership Act 1932, Available Here

[2] N.D. Kapoor, Elements of Mercantile Law, Sultan Chand & Sons Private Limited, Available Here

[3] R.K Bangia, Indian Partnership Act, Allahabad Law Agency, Available Here

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