Liability | A, B, and C are partners in a firm. C retires from the firm under agreement with A and B that all assets and liabilities of the firm will be that of A and B. D, a creditor of the firm sues A, B, and C. C refers to an agreement with A and B and denies liability to D. Discuss the liability of C.

Question: Liability | A, B, and C are partners in a firm. C retires from the firm under agreement with A and B that all assets and liabilities of the firm will be that of A and B. D, a creditor of the firm sues A, B, and C. C refers to an agreement with A and B and denies liability to D. Discuss the liability of C. [DJS 1980]

Find the answer to the mains question only on Legal Bites. [Liability | A, B, and C are partners in a firm. C retires from the firm under agreement with A and B that all assets and liabilities of the firm will be that of A and B. D, a creditor of the firm sues A, B, and C. C refers to an agreement with A and B and denies liability to D. Discuss the liability of C.]

Answer

Section 25 of the Indian Partnership Act lays down a general rule that “Every partner is liable jointly and severally for all acts of the firm done, while he is a partner.”

So each and every partner of the partnership firm remains liable for all acts of the firm done while he was subsisting as a partner and consequently when a partner retires from the firm, he shall be liable for all acts of the firm done before his retirement.

However, Section 32(2) of the Partnership Act provides a mode by which a retiring partner may be discharged from any liability to third party for acts of firm done before his retirement. Section 32(2) of the Act provides hereunder:

“A retiring partner may be discharged from any liability to the third party for acts of the firm done before his retirement by an agreement made by him with such third party and partners of the reconstituted firm and such agreement may be implied by a course of dealings between such third party and the reconstituted firm after he had knowledge of the retirement.”

Thus, the provision entails that when a partner retired from the partnership firm, such retiring partner can be discharged from liability to the third party for acts of firm done before his retirement by an agreement made by him with such third party and continuing partners in the firm.

Such agreement may be expressed or implied by course dealing between such third party and partners of the reconstituted firm after the knowledge of retirement of a partner. So agreement, as contemplated by Section 32(2), must be with a third party as well as with continuing partners. If there is an agreement only with continuing partners, then still third party (or any creditor) who do not have notice of retirement, can enforce the liability against retired partner along with partners of reconstituted firm.

To obtain the release from creditors for any liability incurred before retirement also a complete novation is to be proved which involves:

1. Continuing partners must have agreed with the retiring partner to release or discharge him from existing debts and liabilities, and
2. Creditors should be informed of the retirement of partners and of the new arrangement.

Applying the aforesaid provisions to the present case at hand, where A, B, and C are partners in a firm upon C retirement come under an agreement that all assets and liabilities of the firm will be that of A and B, and C is discharged. When, D, a creditor of the firm sues A, B, and C, C cannot refer to his agreement with A and B and denies liability to D for the reason being that there was no notice of C retirement and agreement between partners discharging C’s liability was sent to the creditor D.

Therefore, notwithstanding the fact that C has retired, he is still liable with A and B for D claims which were incurred as a liability before the retirement of C. Thus, C is liable to be sued.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X