CHAPTER V of the Act as the special committee pointed out is novel in form. It collects in one body, the rules as to the coming in of new partners and going out of existing ones, insofar as the change does not put an end to the firm but leaves the relation between the continuing partners untouched. Men of business will welcome this re-arrangement as convenient.
There is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm’s name till dissolution.
The mutual relations of partners are based on the principal that they have to be just and faithful to each other and are bound to carry on the business of the firm to the greatest common advantage (section 9). Therefore, a new partner can be included in a firm only when the existing partners have faith and trust in him.
where a person so nominated is not acceptable to the other partners, the court cannot force them to enter into partnership with him because the foundation of partnership is mutual confidence, which the court cannot supply where it does not exist.
The articles of a partnership between two persons contained a clause that one would have right to bring his son into the partnership on his attaining 21 years of age. The other partner refused to accept the son. But it was held that he could not do so, the partnership articles being a contract.
1. Subject to contract between the partners and to the provisions of
section 30, no person shall be introduced as partner into a firm without the consent of all existing partners.
2. Subject to the provisions of section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner.
A partner who is new can be introduced into a firm in the following ways—
(i) with the consent of all the existing partners,
(ii) in accordance with a contract between the partners,
(iii) in accordance with the provisions of section 30.
Express power for a senior or principal member of a firm, to introduce one or more new partners named or not under agreed conditions, is in fact constantly given by partnership articles.
Byrne v. Reid, (1902) 2 Ch 735 (CA):
A person duly nominated under such a power acquires rights in the partnership property which the court will enforce by way of appropriate specific relief though it cannot enforce an agreement to enter into partnership because the foundation of partnership is mutual confidence, which the court cannot supply where it does not exist.
Bachubai v. Shamji, (1885) 9 Bom 536 (554):
The consent of all existing partners is required to the introduction of a new partner so that the firm may work harmoniously.
If a contract between the partners permits the introduction of a new partner even without the consent of all the existing partners, that can possibly be done. For example, the contract provides the majority of the partners shall be competent to admit a new partner or anyone of them may nominate a partner or appoint his successor, a new partner could be introduced accordingly.
Lovergrove v. Nelson, (1834) 3 Ny & K 120:
40 RR 1.2: To make a person a partner with two others, their consent must clearly be had, but there is no particular mode or time required for giving that consent, and if three persons enter into partnership by a contract which provides that on one retiring, one of the remaining two, even a fourth person, who is no partner at all, shall name the successor to take the share of one retiring, it is clear that this would be a valid contract which the court must recognise and the new partner would come in as entirely by the consent of the other two, as if they had adopted him by name.
Byrne v. Reid, (1902) 2 Ch 735:
A, B, C, and D were four partners and they, in their partnership deed authorised A to admit his son S into partnership when S had attained the age of twenty-one years. After S attained the age of
twenty-one years, A nominated him as a partner in accordance with the partnership deed and he accepted the nomination, but the other partners refused to recognise heir as a partner. It was held that the son on accepting the nomination had become a partner.
Mulchand v. Manekchand, (1906) 8 Bom LR 8:
It may be noted that a person does not become a partner merely by his nomination. He has an option to become a partner or not. He becomes a partner when after nomination he expressly or impliedly agrees to the same.
British Home Insurance Corpn. v. Paterson, (1902) 2 Ch 404:
“The plaintiff corporation appointed B their solicitor and instructed him to act for them in a mortgage transaction, while the business was pending, B took the defendant P into partnership and gave the plaintiffs notice in writing. The plaintiff paid no attention to the notice, continued to correspond with B in his own name and finally sent money to advance on the mortgage by cheque made payable to his order and accepted his receipt in his own name. B paid the money into his own account and misappropriated it. The plaintiff sued the new partner.
It was held that the plaintiffs had by their conduct declined to accept the liability of the new partner. They had elected to deal with the old partner alone and could not afterwards hold the new partner liable.
Farewell said “where A knowing B and C to be a partners, refused to contract with them jointly and insists on contracting with B alone, he cannot afterwards treat C as liable Central Bank of India v. Tarseema Compressed Wood Mfg Co., MANU/MH/0039/1997 : AIR 1997 Bom 225 after a 4th partner was admitted to a partnership firm, which earlier consisted of only three partners, all of them gave the following undertaking to the bank:
“We are jointly and severally liable to the bank for the liabilities of the firm with the bank. The bank may recover its claims and dues from any or all of the partners of the firm and the assets of any deceased partner.”
“1. A partner may retire—
(a) with the consent of all the other partners,
(b) in accordance with an express agreement by the partners, or
(c) where the partnership is at Will, by giving notice in writing to all the other partners of his intention to retire.
2. 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 partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.
3. Notwithstanding the retirement of a partner from a firm, he and the 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:
Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.
4. Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm.”
A partner of a firm makes himself separate from the firm by any of the following modes—
(a) by retirement,
(b) by expulsion
(c) by insolvency
(d) by death.
A partner may retire from the firm with the consent of the other partners in accordance with an express agreement by the partners or where the partnership is at Will, he may retire by giving notice in writing to all the other partners of his intention to do so.
A retiring partner may get exemption from any liability to third party for the act of the firm done before his retirement by an agreement made by him with such third party –
such agreement may be either express or implied.
After the retirement of a partner from a firm he is not discharged from his liability unless he has delivered a public notice in that connection showing his intention, he and other existing partners or any of them would be liable for the acts of the firm to the same extent as that work would have been before his retirement from the firm. However, such retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.
It is necessary for a retiring partner to give public notice about his retirement to such class of persons who might be concerned in firm’s business transaction.
“Retire”—
The expression ‘Retire’ used under section 32 makes it clear that it applies to the situation when a partner retires from the firm without the dissolution of the firm and the business of the firm is being continued by other existing partners. Therefore, where a partner is retiring from the firm after dissolution, that would be dissolution of the firm and does not amount to retirement.
According to Lindley’s partnership rule, the right of a retiring partner is subject to some restriction. Lindley has laid down three rules which widens the rights of a retiring partner but in fact it restricted the right to some extent.
According to section 32(1), a partner may retire—
(a) with the consent of all the other partners, or
(b) in accordance with an express agreement by the partners, or
(c) where the partnership is at Will, by giving public notice or writing to all the other partners of his intention to retire.
“Where no provision is made by contract between the partners for the duration of their partnership the partnership is partnership at Will”.
Notice should be in writing, signed by the partners and should be served upon all the partners. As between the partners, the retirement becomes effective from the date mentioned in the notice, or if no date is mentioned, from the date of service.
“1 A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners.
2 The provisions of sub-sections (2), (3), (4) of section 32 shall apply to an expelled partner as if he were a retired partner.”
Where the terms of partnership confer power to expel a partner, its exercise will not be in good faith unless it is done with an honest view in the interest of the firm and with notice to the partner affected and an opportunity of being heard.
Shivraj Reddy & Bros. v. S. Raghu Rao Reddy, AIR 2002 NOC 120 (AP):
A partner cannot be expelled from a firm by any majority of partners. But section 33 provides that a partner may be expelled in the exercise in good faith of the powers of expulsion, if any, given to the partners by their mutual agreement. Thus expulsion, is justifiable only when it is authorised by an agreement between the partners.
Blisset v. Daniel, (1853):
Where in exercise of their power conferred in most unfettered terms, majority of the partners expelled a partner on the ground that he had opposed the appointment of one of the partner’s son as manager, the court held the expulsion to be unwarranted and an abuse of power.
Green v. Howell, (1910) 102 LT 347 (CA):
1910 1 Ch 495: Where a clause in a partnership deed empowered the partners to expel a partner who was guilty of flagrant breach of his duties, the court refused to interfere when it found on evidence that kind of breach of his duties was established. The expelled partner’s contention that he was not given show cause notice before expulsion did not help him because the partners who expel do not act as a tribunal.
Ganesh Chandra v. Gopal Chandra, MANU/WB/0088/1976 : AIR 1976 Cal 459:
The power of expulsion can be exercised by a majority and not by a single partner. Where, of the three partners, two were guilty of misconduct and the third proceeded to expel them, the court held that if this expulsion is allowed it would reverse the meaning of the section which contemplated expulsion by the majority of a minority and not vice versa.
Wood v. Wood, LR 9 Ex 190: (1874) 43 LJ Ex 153:
Where a plaintiff partner was expelled from the firm and kept out of its business and was also denied his share of profits etc., it was held that the case of action for questioning the validity of the ousting and for reinstatement as partner or for seeking dissolution arose at the time of expulsion and, therefore, the proceedings instituted four years thereafter were barred by time.
1. Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.
2. Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any acts of the insolvent, done after the date on which the order of adjudication is made.
Section 34 of the Indian Partnership Act deals with the circumstances and effect of insolvency of a partner from a firm. This section provides that where a partner in a firm has been adjudicated as an insolvent he ceases to be a partner on the date on which the order of adjudication is made.
Sub-section (2) of section 34 lays down the circumstances where under a contract between the partners, the firm is not dissolved by such adjudication of a partner as an insolvent. In such case, the estate of a partner declared insolvent would not be liable for any act of the firm and the firm is also not liable for the act of such insolvent partner from the date of adjudication made as an insolvent.
Generally, a firm is dissolved after the order of adjudication is made on account of insolvency of a partner. However, it is not necessary to dissolve a firm after such adjudication. The other existing partners are competent to continue to do the business of the firm by mutual contract. The other partners may by agreement agree not to dissolve the firm after adjudication of insolvency of a partner and can carry on the business of the firm. An effect of insolvency of a partner of a firm may be conveniently read along with the sections 34, 41(a), 42(d) and 47 of this Act.
Where a partner has been declared as an insolvent he ceases to be a partner from the date on which the order of adjudication is made as an insolvent. In the absence of an express agreement the firm will be dissolved from the date of such adjudication. The other existing partners can continue the firm only by contract or agreement after such adjudication.
The insolvency of a partner does not invariably result in dissolution of the firm, for it is open to the partners to agree that the adjudication of a partner as an insolvent will not dissolve the firm as regards the continuing partners.
Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death.”
“When a partner dies, he; of course, ceases to be a partner. The firm may or may not thereby be dissolved. The estate of the deceased deserve to be protected from any partner’s further liability in respect of any act of the firm done after the time of his death. This section is designed only to provide that protection. No public notice is necessary to terminate the liability of the deceased partner. Death is also a notice by itself.
Sections 45(1) and 35 jointly lays down a general rule that the estate of a deceased partner is not liable for any act of the firm done after the death of that partner, whether or not the firm is dissolved. Since death is a public incident, it does not require to give a public notice to absolve the estate of a deceased partners from liability for the future obligation of the firm.
“1. An outgoing partner may carry on a business competing with that of the firm and he may advertise such business but, subject to contract to the contrary, he may not—
(a) use the firm’s name,
(b) represent himself as carrying on the business of the firm, or,
(c) solicit the customer or persons who were dealing with the firm before he ceased to be a partner.
2. A partner may make an agreement with his partner that on ceasing to be a partner he will not carry on any business similar to that of the firm within specified period or within specified local limits and notwithstanding anything contained in section 27 of Indian Contract Act, 1872 (IX of 1872), such agreement shall be valid if the restrictions imposed are reasonable.”
Under Indian Partnership Act, the outgoing partners have certain rights which are enunciated under sections 36, 37 of the Act. Section 36 deals with the rights of an outgoing partner to carry on a competing business.
Section 36 of the Partnership Act, authorises an outgoing partner to carry on a business competing with that of the firm and he may advertise his business but subject to contract to the contrary, he may not,—
(a) use the firm name,
(b) represent himself as carrying on the business of the firm,
(c) solicit the customers or persons who were dealing with the firm before he ceased to be a partner.
Sub-section (2) of the section allows a partner to enter into an agreement with his co-partner that on ceasing to be a partner he will not carry on any business similar to that of the firm, within a specified period or within specified local limits. Such agreement is valid and shall not be considered as violative of the restraint of trade, provided, the restrictions imposed are reasonable.
Section 36(2) permits an agreement being made that the outgoing partner be restrained from carrying on business similar to that of the firm. Such an agreement has been declared to be valid and constitutes an exception to the rule contained in section 27 of Indian Contract Act which declares an agreement in restraint of trade as void. It is, however, necessary that:
(i) the agreement restraining the outgoing partner from carrying on a similar business should stipulate that such a business will not be carried on for a specified period or within specified local limits, and
(ii) the restriction imposed should be reasonable.
When a partner ceases to be a partner by retirement, expulsion, insolvency or death, his share in the property of the firm may not be immediately paid to him and the firm may continue the business without any final settlement of accounts between the outgoing partner or his estate and the other. Section 37 gives an option to the outgoing partner or the representative of the deceased partner, who has not been paid his share of the property, either:
(i) to claim such share of the profits made since he ceased to be a partner as may be attributed to the use of his share of the property of the firm, or
(ii) to claim an interest at the rate of 6% per annum on the account of his share in the property of the firm.
Where a partner has retired from the firm after selling his share in the partnership firm and the firm is reconstituted with new partners, the share of the retired partner is to be valued as on the date of his retirement.
Espley v. Williams, (1997) QBEG 137 CA:
Two persons entered into an agreement to run an estate agency in partnership. There was a covenant restraining one of them from practising as an estate agent on his own account, or with any other person or company within two miles of the partnership premises and also within two years of the termination of the partnership. He left the partnership and commenced practice as an estate agent with another agent within the time period and within the given area.
The court enforced the covenant. The court said that the goodwill of the partnership was a legitimate interest which the other partner was entitled to have protected. The restrictive covenant could not be described as a covenant against competition. The covenant was no more than was adequate to protect the goodwill of the partnership.
Where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representative to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the property of the firm:
Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits, but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section”.
Section 37 deals with rights of outgoing partners. It lays down a substantial law relating to a liability of the surviving or continuing partner, who without a settlement of accounts with legal representatives of the deceased partner utilises the assets of partnership for continuing the business.
Although the principle applicable to such cases is clear but at times some complicated questions arise when disputes are raised between the outgoing partner or his estate on the one hand and the continuing or surviving partners on the other in respect of subsequent business. Such disputes are to be resolved keeping in view the facts of each case having due regard to section 37.
Pamuru Vishnu Vinodh Reddy v. Chellakuru Chandrashekhar Reddy, MANU/SC/0123/2003 : (2003) 3 SCC 445:
A and B are partners. A dies. B instead of winding up the affairs of the partnership, retain all the assets in the business. B must account to A’s legal representative for the profits arising from A’s share of the capital.
The principle of this section is applicable even when only part of the retiring partner’s assets is utilised by the surviving partners. The section lays down the substantive law relating to the liability of a surviving partner who without a settlement of accounts with the legal representative of the deceased partner utilises the assets of the partnership for continuing the business on his own.
Barclays Bank Trust Co. Ltd. v. Bluff, (1982) Ch 172:
The partnership between a father and son as farmers was dissolved by the death of the father. There was, however, a substantial delay in winding up of the affairs of the firm. During their period of delay, the son carried on the farming business and the value of the firm appreciated considerably. It was held that the executer was entitled, at his option, to interest at the rate of five per cent. as prescribed in the corresponding provision of the English Act contained in section 42(1), on the father’s share of the partnership asset or to a share of the profits occurring in the ordinary course of carrying on the business since the date of death, i.e., profits arising from the use of the farm land and building not including any capital profits which might be realised on a sale of the land and buildings. It was held that the estate’s entitlement would not be affected by an election to take interest.
Illustration
(i) A, B, C are partners in a manufacture of machinery. A is entitled to three-eighth of the partnership property and profits. A becomes bankruptcy, whereas B and C continue the business without paying out A’s share of the partnership assets or settling accounts with his estate. A’s estate is entitled to three-eighth of the profits made in the business, from the date of his bankruptcy until the final liquidation of the partnership affairs.
(ii) A, B, C are partners. C after selling his share in the partnership firm, A and B fail to pay the value of the share to C as agreed to the value of the share of C on the date of his retirement from the firm would be pure debt-from the date on which he ceased to be a partner as per the agreement entered between the parties. C is entitled to recover the same interest.
Tilokram Ghosh v. Gita Rani, MANU/WB/0045/1989 : AIR 1989 Cal 254 (258):
The right and/or the option contained by the provision of section 37 on the estate of the deceased partner cannot be properly exercised until the account of the subsequent business are made available and as much the estate of a deceased partner is not bound to make the election until the profit earned in respect of the share of the deceased partner is ascertained on dissolution of the firm, they will be entitled to exercise their option enforced by section 37 when the accounts of the dissolved firm would be taken in accordance with the provisions of section 48 of the Partnership Act.
M.C. Sharma v. B.C. Sharma, MANU/UP/0183/1986 : AIR 1986 All 69:
Section 37 does not contemplate the dissolution of firm by a notice under section 43. A suit by an individual partner for continuing of business, when other partners are seeking dissolution is not hit by section 37.
“A continuing guarantee given to a firm, or to a third party in respect of the transaction of a firm is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm.”
Section 38 of the Indian Partnership Act deals with the cases of revocation of the continuing guarantee to a firm. The section, lays down that a continuing guarantee given to a firm or to a third party in respect of the transaction of the firm is in the absence of agreement to the contrary, revoked as to future transaction from the date of any change in the constitution of the firm.
N.C. Mukherjee v. Biro Das, ILR 1901 Cal 397:
In this case ‘A’ was a surety to the firm “N.C. Mukherjee” for the conduct of ‘B’, a cashier in the firm of N.C. Mukherjee. Later on a change took place in the constitution of the firm and its name was altered to “N.C. Mukherjee & Sons”. It was held that the surety was not liable for B’s defamations subsequent to the change in the constitution of the firm.
Section 38 deals with the effect of the change in the constitution of a firm on continuing guarantee and provides that any change in the constitution of a firm will have the effect of revoking a continuing guarantee given to that firm or to a third party in respect of transaction of a firm, from the date of change in the constitution of the firm, unless there is an agreement to the contrary.
The expression ‘continuing guarantee’ has been defined in section 129 of the Indian Contract Act as follows—
“A guarantee which extends to a series of transactions is called continuing guarantee.”
This continuing guarantee may be revoked. Section 130 of the Indian Contract Act deals with the revocation of continuing guarantee and provides that:
“A continuing guarantee may at any time be revoked by the surety as to future transactions, by notice to the creditor.”
Neel Comul Mookerjee v. Bipro Das Mookerjee, (1901) 28 Cal 597:
It was held that on this change the guarantee was revoked and the surety was not liable for the conduct of the cashier subsequent to such change.
© Universal law Publishing Co.