Rights and Duties of Partners
by Asok Nadhani
3.1 Mutual Relation of Partners
Every partner is
an agent of other partners for all business related matters. The relationship
of partnership comes into existence by an agreement between the partners
providing for mutual rights and duties of the partners which are governed by
their own contracts either expressly or impliedly from the course of dealing
among them. It can vary with the consent of all partners and such a consent may
be expressed or implied by a course of dealing [sec.11(1)].
Principles
governing Mutual Relations of Partners (Secs. 9, 11)
1.
Relations as per
the provisions of the Agreement (Sec. 11)
Partners should
have the freedom to arrange their own affairs amongst themselves. The mutual
relation amongst the partners is a matter of internal management of affairs of
the firm.
Partners may specify
their respective rights and liabilities which can be varied only with the
consent of all other partners. However, such agreement regulating the mutual
relations of partners shall affect the partners only, and shall not bind the
third parties.
2.
Principle of
absolute good faith (Sec. 9)
Every partner
must be faithful and sincere to the other partners and carry on business on
behalf of the firm in most beneficial manner to the firm. This principle cannot
be excluded or modified even with the consent of all the partners.
3.2 Rights of Partners in a Partnership Firm
Contract between
the partners, either expressed in writing or implied by course of dealings,
shall determine the mutual rights of the partners[a1] .
1.
Rights to take
part in conduct of Business
Every partner has a right
to take part in the conduct of the business [sec.12(a)].
However, the agreement
between the partners may provide for the exclusion of such right in case of
some partners. If a partner neglects or refuses to perform his duties and the
burden of performing such duties falls on other partners, the defaulting
partner has to compensate the other partners.
2.
Rights to be
consulted
Every partner has a right
to be consulted in all business related matters of the firm. He can also
exercise his right to express his opinion before the matter to be decided. Any
difference of opinion shall be resolved by a majority of partners.
In exercising the powers,
the majority of partners shall act in good faith. If the partners are equally
divided, there will be no change regarding the important matters of business,
without the consent of all the partners [sec.12(c)].
3.
Rights to have
access to books
The books of account of the
firm are to be kept at the principal place of business. Every partner or a duly
authorised agent of each partner has the right to obtain full information
regarding the affairs of the partnership including all acts, transactions,
dealings relating to the partnership funds and partnership property; examine
the books and accounts of the firm and obtain a copy of such books and accounts
[sec.12(d)]. A minor partner can also access to and inspect any of the accounts
of the firm but not books [sec.30(2)].
However, the agreement
between the partners may provide for the exclusion of such right in case of
some partners.
4.
Rights to share
profits
If there is no agreement
between the partners, all the partners are entitled to share the profits
equally and also liable to bear the losses equally sustained by the firm
[sec.13(b)]. However, the agreement between the partners may provide otherwise.
5.
Rights to claim
Interest on Advances
A partner is entitled to
claim interest on any payment or advance made for the purposes of business of
the firm beyond the amount of capital. The interest shall be payable at the
rate of 6% per annum or at the specified rate agreed in the agreement
irrespective of the fact that whether or not the firm makes a profit
[sec.13(d)]. Such interest can be paid
out of the profits or out of the assets of the firm.
6.
Rights to claim
Interest on Capital
If there is a provision in
the agreement regarding the partner’s right to claim interest on capital at a
specified rate, it shall be paid only out of profits [sec.13(c)]. However, the
agreement may provide that interest on capital shall be paid whether or not the
firm earns a profit.
7.
Rights to be
indemnified
During an
emergency, if a partner has acted as a man of ordinary prudence for protecting
the firm from loss, in the ordinary and proper conduct of the business, he has
a right to be indemnified by the firm in respect of payments made and
liabilities incurred by him [sec.13(e)]. Such acts of the partner bind the firm
(sec.21).
8.
Rights to use
Partnership Property
Every partner has a right
to use the partnership property only for the purpose of business of the firm.
No partner can treat partnership property as his personal property (sec.15). If
a partner uses the property of the firm, directly or indirectly, for his
personal benefit he must account to the firm for the profits, which he may have
earned.
However, a partner may use
the partnership property for his personal purposes also, if the agreement
between the partners so provides.
9.
Rights to give
consent for admission of a New Partner
A new partner can be
admitted in the firm only if all the partners have given their consent or there
is an express term in the contract permitting such admission [sec.31(1)].
10. Rights to retire from the firm
A partner has a right to
retire:
(a)
by giving a written notice of his intention to
retire to all the partners, if the partnership is at will
(b)
with the consent of all other partners
(c)
in accordance with an express agreement entered
into between the partners in case of a particular partnership [sec.32(1)].
11. Rights to remuneration
No partner is entitled to
receive any salary or remuneration for taking part in the conduct of the
business or if he renders extraordinary services.
However, the agreement
between the partners may expressly provide for payment of remuneration to
working partners.
12. Rights not to be expelled out of partnership
Every partner has a right
not to be expelled until his retirement or death. However, a partner may be
expelled if the power to expel a partner is contained in the agreement between
the partners, and such power is exercised by a majority of partners, acting to
good faith [Sec. 33(1)].
13. Rights to carry on competing business
An outgoing partner has a
right to carry on a competing business with that of the firm and he may
advertise such business but subject to the conditions of not using the firm’s
name, not representing himself as partner of the firm and not soliciting the
custom of persons who were dealing with the firm before he ceased to be a
partner (sec.36).
14. Rights of an outgoing partner to receive subsequent
profits
Where a partner has died or
ceases to be a partner by retirement, expulsion, insolvency or any other cause,
and the firm continues to carry on business, without final settlement of
account of the outgoing partner, the outgoing partner or legal representative
of the deceased partner has a right to receive higher of the following two
amounts:
(a)
Interest at the rate of 6% per annum on the money
remaining unpaid.
(b)
Such proportion of profits as have been earned by
the firm by use of money remaining unpaid to the retiring partner (sec.37).
However, the agreement
between the partners may provide otherwise.
15. Rights as agent of the firm
Every partner is the agent
of the firm for the purposes of business of the firm (sec.18) and the act of a
partner to carry on the business of the firm binds the firm (sec.19).
16. No liability for pre-joining period
A newly admitted partner is
not liable for any act of the firm done before he became a partner [sec.31(2)].
17. Rights after expiry of the term of firm
If a firm continues to work
even after the expiry of its term, the rights of the partners will remain same
as they were before the expiry of the term [sec.17(a)].
18. Right as to additional undertakings
Rights as to additional
undertakings of the firm will remain same with that of the original
undertakings [sec.17(c)].
3.3 Duties of Partners in a Partnership Firm
The duties of partners may
be classified as follows:
-
Duties which can be modified by an agreement
between the partners.
-
Duties which cannot be modified.
3.3.1 Duties which can be modified by an agreement
between the Partners
Certain duties can be excluded by an agreement to the contrary. The
partnership may enter into a contract that any of these duties shall not apply
to them. Hence, the partners can alter, exclude or eliminate the application of
these duties by entering into an agreement. Such duties are subject to a
contract between the partners and are called as General Duties, as discussed below:
1.
Duty to share
losses
Every partner is
liable to contribute equally to the losses sustained by the firm [sec.13(b)].
However, the agreement between the partners may provide that some partner shall
not be liable to share the losses, i.e., he shall be a partner in profits only.
2.
Duty not to make
personal profits
The partners are
duty bound to carry on the firm’s business to greatest common advantage without
making personal profits.
If a partner
derives any personal profit from any transaction of the firm, or from the use
of the property or business connection of the firm or name of the firm, he
shall be liable for that profit and pay it to the firm. [sec.16(a)]
Example: XYZ & company is a
partnership firm consisting of three partners X, Y and Z, and carrying on the
business of trading in furniture. The company entrusts Y with the
responsibility of purchasing furniture on behalf of the firm. Y supplies the
furniture from his own stock by making considerable profit, but does not
disclose this fact to other, partners, X and Z. In this case, Y is guilty of
bad faith, and so he is liable to account for the profit made by him to the
firm.
3.
Duty not to
profit in competing business
A partner must
not carry on any business of the same nature to compete with that of the firm.
If one of the partners carries on rival business to compete with and to the
prejudice of the firm, the other partners are entitled to the following rights:
a)
They can restrain that partner by an injunction
order from the Court,
b)
the other partners may sue him to account for the
profits made by him in the rival business. However, this duty may be excluded
by an agreement between the partners [sec.16(b)].
Example:
A and B are
partners in a business which consists of supplying cloth to the government.
Subsequently, it is found out that A is engaged with C in the supplying of
cloth to the same government. A is bound to account to the firm for the profits
so made by him.
4.
Duty not to
carry any other business
The partner
shall not carry on any business other than the business of the firm, whether or
not such business is similar or competing with the business of the firm until
he continues to be a partner in the firm. Such agreement between the partners
shall not be deemed to be an agreement in restraint of trade under sec. 27 of
the Indian Contract Act, 1872, and consequently, such agreement is legally
enforceable.
5.
Duty to
indemnify the firm for loss due to willful neglect
A partner has to
indemnify the firm for any loss caused to the firm by his willful neglect
subject to contract between the partners in the conduct of the business of the
firm [sec.13(f)]. The firm becomes liable to the third party for such willful
neglect or fraud of any partners. However, this duty may be excluded by an
agreement between the partners.
6.
Duty to make
proper use of property of the firm
The partnership
property must be used exclusively for the business of the firm, but not for his
personal benefit. If any partner makes personal profits by using the
partnership property, he is liable to account for the profit made by him.
Moreover, if any damage is incurred to the partnership property, he has to
compensate the firm for such loss. However, this duty may be excluded by an
agreement between the partners (s.15).
7.
Duty not to
claim remuneration
A partner is not
entitled to receive any remuneration for taking part in the conduct of the
business of the firm. However, some remuneration can be provided to the working
partners, if there is a specific agreement relating to the fact. [sec.13(a)]
Where extra
trouble is imposed to a partner due to wilful neglect of duty of another
partner, he is entitled to be compensated.
8.
Reconstituted
firm : In a reconstituted firm, a partner has the same duties as he was
having prior to the reconstitution of the firm. [sec.17(a)]
9.
Particular
Partnership: When a firm set up for a fixed
term continues even after the expiry of the firm, the duties of partners will
remain same as before the expiry of the term. [sec.17(b)]
10. Additional Undertakings : Where a firm takes over
some additional undertakings, the duties of partners will be same as in respect
of the original undertaking. [sec.17(c)]
3.3.2 Duties which cannot be modified
The Act has specified certain duties which cannot be excluded by an
agreement to the contrary. Hence, every partner must perform these duties
(called as Absolute Duties), even if
the agreement entered into between the partners, exempts any partner from
performance of these duties.
1. Duty of good faith
Every partner is
duty bound to act in good faith and he must be just and faithful. No partner
should deceive any other partner. Every partner must act diligently and
sincerely in the conduct of business. Thus, utmost good faith is required
between the partners inter se.
Example:
A secret
agreement between two partners causing an injury to the other partners amounts
to a breach of duty imposed upon the partners. As the partners have to be just
and faithful to each other, the agreement becomes unlawful, and consequently
void.
1.
Duty to carry on
business to the greatest common advantage
Every partner
must conduct the business of the firm in such a manner which is most beneficial
to the firm. No partner should make any profit at the expense of the firm and
he must do his best by using his knowledge and skill in the common interest of
the firm.
Example:
A and B were partners
in a business relating to jute. B was authorized to buy jute for the firm. He,
without A’s knowledge, supplied to the firm his own jute at the market price.
He had bought the jute at a lower price and thus made a considerable profit.
Held, he must account to the firm for the profit made.
2.
Duty to render
true accounts
Every partner
should keep proper accounts of all money transactions relating to the business
of the partnership and should render true accounts and full information of all
the transactions affecting the firm to the other partners. They should also
explain all the accounts to the other partners (sec.9).
3.
Duty to give
full information
Every partner is
duty bound to give full information to the other partners regarding the affairs
of the firm without concealing the facts.
If a partner is
in possession of some material facts relating to certain partnership assets,
but he does not disclose those facts to the other partners, and purchases other
partners share in partnership, it amounts to a breach of duty of good faith.
Such transaction is voidable at the option of the partners from whom the
material facts were concealed (sec.9).
4.
Duty to
indemnify for loss caused by fraud
If any fraud is
committed by a partner in the conduct of business of the firm, he shall be
liable to indemnify the firm for loss caused to it (sec.10). If an innocent
partner becomes liable to third parties due to the committed fraud of other
partner, he can claim damages from the defaulting partner.
5.
Duty to act
within authority
Every partner is
duty bound to act within the scope of his authority, expressed and implied
[sec.19(1)]. If he exceeds the authority conferred on him and the firm suffers
a loss, he is liable to compensate the firm suffering from such loss.
6.
Duty to be liable
jointly and severally
Every partner is
jointly and severally liable for the acts of the firm done while he was a
partner (sec.25).
8.
Duty to attend
diligently
Every partner
should attend his duties diligently in the conduct of the business of the firm
[sec.12(b)].
9.
Duty not to
assign his rights
A partner cannot
assign his rights and interest in the firm to an outsider by making him as the
partner of the firm. However, he can assign his share of the profits and share
in the assets of the firm (s.29).
3.4 Liabilities of a Firm and its Partners to Third
Parties
Third Party
means any person who is not a Partner in the Firm. A partner is solely and
jointly liable to third parties for all acts done on behalf of the firm. The
following are the liabilities for implied authority of a partner[a3] :
1.
Liability for
extension and restriction of partner’s implied authority (Sec. 20): The partners in
a firm can extent or restrict the implied authority of any partner by a mutual
contract between them.
The third party is however
not affected by such restriction on the implied authority of a partner unless
he has notice of it. Where a partner exceeds his authority, the firm shall not
be liable for such act, since it does not amount to an act of the ‘firm’.
2.
Liability for
admission by a partner (Sec. 23): Where a partner makes any admission or
representation relating to the affairs of the firm, it is binding on the firm
as the partners are agents of each other for carrying on the business of the
firm. But, when such admission or representation has been done by the partner
beyond the scope of his authority, the firm will not be bound by such action.
3.
Effect of notice
to a partner (Sec. 24): Notice to a partner dealing with the affairs of the
firm is treated as the notice to the firm except in case of a fraud committed
by a third party with the consent of the partner.
4.
Liability of
partners for acts of the firm (Sec. 25): According to sec.2(a), ‘Acts of a firm’ means any act or
omission by all the partners, or by any partner, or agent of the firm which
gives rise to a right enforceable by or against the firm. Every partner is
severally and jointly, with all other partners, liable for all the acts done
while he is a partner. But, if a partner of the firm deals with a third party
on his own account, the firm shall not be liable for any loss caused to the
third party.
5.
Liability of the
firm for wrongful acts of a partner (Sec. 26): A partner is an agent of
the firm. Therefore, if loss is caused to a third party because of a wrongful
act committed by a partner, while acting in the ordinary course of business
(i.e., within his implied authority); or with the authority of all other
partners (i.e., within his express authority), the firm shall be liable for it.
6.
Liability of the
firm for misappropriation of money or property (Sec. 27): A third party
may hold the firm liable for misappropriation of money .
7.
Liability by
holding out: If a person becomes a partner by holding out, he is liable as a partner
on the principle of ‘partner by holding out’.
3.5 Authority of a Partner
Every partner is
the agent of the firm for the purpose of the business of the firm (s.18). Every
partner is also a principal, since he is bound by the acts done by other
partners. Thus, a partner performs dual role, i.e., role of a principal as well
as role of an agent. He can act on behalf of the firm and bind the firm
provided-
(a)
he does the act for carrying on the business of the
kind carried on by the firm, in the usual way
(b)
the act is done in the name of the firm.
Express Authority (Sec. 20)
Where all the partners mutually agree to confer certain powers, called
as Express Authority, on a partner, such partner can exercise all such powers
and he shall be called as acting within his express authority. The firm shall
be bound by all the acts of a partner falling within his express authority.
Implied Authority (Sec. 19)
According to sec.19(1), implied authority means the authority of a
partner to bind the firm by such act, which is done to carry on, in the usual
way of the kind of business carried on by the firm. It is the authority which
is not expressly conferred on a partner, i.e., it is not expressed in writing
in the partnership deed, but the persons dealing with the firm may rightfully
assume that such type of authority has been conferred on every partner of the
firm.
Authority in Emergency (sec.21)
An act falling
outside the authority (implied as well as expressed) does not ordinarily bind
the firm. However, such an act done in case of emergency as a prudent person
save the firm from loss, shall be binding on the firm, even the partner
exceeded his authority
Example:
Mr. Sen, a
partner, receives goods at Delhi Delhi
3.6 Implied
Authority
As per sec. 19, a firm shall be bound by all the acts falling within the
implied authority of a partner, subject to the fulfillment of following
conditions:
(a)
The act done by the partner must relate to the
normal business of the firm.
(b)
The act has been done by the partner in the usual
way of carrying on the business of the firm.
(c)
The act has been done in the name of the firm or in
any other manner expressing or implying an intention to bind the firm (sec.22).
Where a partner does any act in his own name, the firm shall not be bound by
such an act, even if the act relates to the business of the firm and is done in
the usual way.
Implied authority of every
partner in a Trading Firm
(a)
To engage a lawyer to defend an action to be
conferred on every partner.
(b)
To purchase goods, which are used in the business
of the firm, on behalf of the firm.
(c)
To sell the goods of the firm.
(d)
To receive payment of the debts due to the firm and
give receipts for the same.
(e)
To settle accounts with the persons dealing with
the firm.
(f)
To engage servants to perform the business of the
firm.
(g)
To borrow money for the purpose of carrying on
business of the firm.
(h)
To pledge the partnership property for the
repayment of borrowings made for the purpose of business of the firm.
(i)
To make, draw, accept and indorse bills and other
negotiable instruments in the name of the firm.
3.6.1 Acts outside the Implied Authority (S. 19 and
s.20)
The restrictions on implied authority may be described as below
Statutory Restrictions
The following
restrictions are contained in the Indian Partnership Act, 1932, The firm shall
not be bound by any act falling within the ‘statutory restrictions’
irrespective of the fact that the other party had knowledge of such restrictions
or not.
-
To open a banking account, on behalf of the firm,
in his own name.
-
To withdraw a suit or proceedings filed on behalf
of the firm.
-
To admit any liability in a suit or proceedings
against the firm.
-
To compromise or relinquish any claim or portion of
claim by the firm.
-
To submit a dispute to arbitration.
-
To acquire immovable property on behalf of the
firm.
-
To transfer immovable property belonging to the
firm.
-
To enter into partnership on behalf of the firm.
[sec.19(2)]
A contract falling under
statutory restrictions may be entered into in any of the following ways:
§ Such contract
may be made with the specific or express authority of all the partners, if the
usage or custom of trade permits him.
§ All the partners
may agree to confer the authority on a partner to enter into such a contract.
In such a case, the contract entered into by one partner, so authorised, shall
be binding on the firm.
Restrictions imposed by Mutual Agreement
Apart from
statutory restrictions, some additional restrictions may be imposed on implied
authority of any partner by the Partnership Act, called as ‘restrictions
imposed by mutual agreement’.
The implied
authority of a partner may be restricted by an agreement also. The restrictions
may relate to any act, like, restriction on purchase or sale by a partner,
restriction on borrowing money, restriction on receiving money from the
customers etc.
The effect of
these restrictions is that the firm shall not be bound by any act falling
within the ‘other restrictions’ if the other party had knowledge of such
restriction. Hence, if the other party had no knowledge of the restriction
imposed on the implied authority of a partner, the firm will be bound by the
act of the partner.
3.7 Matters requiring unanimous consent of Partners
Every partner
has a right to be consulted and express his opinion in all matters relating to
the business of the firm. If any difference of opinion arises amongst the
partners on an ordinary matter, it shall be resolved by a majority of partners.
However, the
following matters require unanimous consent of the partners:
1.
Change in nature
of business (Sec. 12)
If there is a confliction
between opinions of partners on a fundamental matter relating to the business
(i.e., change in the nature of business carried on by the firm, or alteration
of agreed business, or addition of a new business), it shall be resolved with
the consent of all the partners. Otherwise, the firm cannot start a new
business where even a single partner objects to it.
2.
Imposition of
restrictions on implied authority of a partner (Sec. 20)
Restrictions on implied
authority of a partner may be imposed only by way of an agreement between all
the partners.
3.
Admitting a
minor to the benefits of partnership (Sec. 30)
A minor can be admitted to
the benefits of partnership with the consent of all the partners of the firm.
4.
Admission of a
partner (Sec. 31)
A new partner can be
admitted only with the consent of existing partners. Further, a new partner can
also be admitted in accordance with an express agreement entered into between
the partners.
5.
Change in profit
sharing ratio
The profit sharing ratio of
partners can be changed only with the consent of all the parties.
3.8 Reconstitution of Firms
When a change
occurs in the constitution of a firm, such change results in ‘reconstitution of
the firm’ and the firm is said to be ‘reconstituted firm’ after such change.
The firm continues as a new firm or a reconstituted firm.
Modes of reconstitution
A firm may be
reconstituted in any of the following modes:
(a)
Admission of a Partner (Sec. 31)
(b)
Retirement of Partner (Sec. 32)
(c)
Death of a Partner (Sec. 35)
(d)
Insolvent, i.e., insolvency of Partner (Sec. 34)
(e)
Expulsion of a Partner (Sec. 33)
(f)
Transfer of a Partners interest (Sec. 29).
Continuing Guarantee
A continuing
guarantee given to a firm, or to a third party in respect of the transactions
of a firm is revoked as to future transactions from the date of any change in
the constitution of the firm. (Sec. 38)
3.9 Position of Incoming Partner after
Reconstitution of the Firm (Sec. 31)
According to
sec.30, a person may be admitted as a new partner either with the consent of all existing partners or in accordance with a contract already entered into between the
existing partners for the admission of a new partner [sec.31(1)].
Admission of new Partner without consent of all Partners
A partner can be
admitted without consent of the existing partners in the following cases:
(a)
If there is a contract between the partners as
such,
(b)
If a minor elects to become a partner on attaining
age of majority.
Example:
B and R were
partners in a firm. One of the terms of the partnership deed was that B could
introduce into the partnership any of his sons on their attaining the age of
21. B’s son S attained the age of 21 and he proposed to make him a partner. R
refused to consent. Held, R could not prevent S from being a partner as the
clause in the partnership agreement operated as a consent.
Liabilities of an Incoming Partner
i. He does not
become liable for any act of the firm done prior to his admission [Sec. 31(2)],
since, the old partners were not the agents of the new partner.
ii.
The new partner may be made liable for the past
liabilities of the firm by mutual agreement. But it does not give right to the
creditors of the firm to sue the new partner for the recovery of old debts,
iii.
The acts of the old partners cannot be ratified by
the new partners.
iv.
He is liable for the acts of the old firm only, if-
(a)
the new firm assumes the liabilities of the old
firm
(b)
the creditors accept the new firm as their debtors
to discharge the old firm from its liability.
Minor Partner becoming major
The position of
a minor, who elects to become the partner of the firm on attaining majority, is
different from that of a new partner. The Minor is liable to all acts of the
firm since he was admitted to its benefits, while a new partner is not liable
for the past acts of the firm, unless there is an express agreement as such..
3.10 Position of Retiring or Outgoing Partner after
Reconstitution of the Firm (Sec. 32)
A partner may
retire from a firm:
i.
in accordance with an express agreement by the
partners,
ii.
with the consent of other partners, or
iii.
in case of the partnership at will, by giving
notice in writing to all other partners of his intention to retire [sec.32(1)].
During retirement
of partners, one partner withdraws from the firm and the other partners
continue to carry on the business of the firm without dissolution of
partnership between them. The share of profit and interest of the retiring
partner is taken over by the existing partner(s) in an agreed manner.
3.10.1 Rights & Liabilities of a Retiring or
Outgoing Partner
Liabilities for
debts incurred before retirement: A retiring
partner continues to be liable for all the acts of the firm done before his
retirement or the acts pending at the time of his retirement, unless he is
discharged from his liability.
However, a retiring partner
shall not be liable for any act done before his retirement in the following
circumstances-
(a)
Where the retiring partner enters into an agreement
with other partners that he shall not be liable for past debts of the firm.
(b)
Where the reconstituted firm enters into a contract
with a creditor to the effect that the old firm is discharged, and the
reconstituted firm is taken as debtor. In this case, the creditor cannot sue
the retiring partner for past debts.
Liability for
debts incurred after retirement: A retiring
partner, with other partners at the time of retirement, continues to be liable
as partner to the third parties for any act done by any of the partners after
retirement, until public notice of his retirement is given [Sec. 32(3)].
This rule is based on the
principle of holding out. Such notice may either be given by the retiring
partner or any of the partners of the reconstituted firm [sec.32(4)]. If public
notice is not given, the firm shall continue to be liable for all acts of the
retired partner subsequent to the date of retirement.
But a retired partner is
not liable for the acts of the firm done after his retirement, provided the persons
dealing with the firm do not know that he was a partner as such [proviso to
sec.32(3)] which refers to the retirement of a sleeping or dormant partner.
Example:
A, B, C and D are partners
in a firm. A, B and C are active partners, while D is a dormant partner. C and
D retire from the firm without giving public notice. A and B take E into
partnership continuing the old firm name. X gives credit to the firm as newly
constituted without having notice of the change.
Rights of a Retiring or Outgoing partner: A retired
partner can exercise the following rights:
1.
A retired partner may carry on a business competing
with that of the firm, but subject to the contrary he may not:
(i)
use the name of the firm; or
(ii)
represent himself to be a partner of the firm; or
(iii)
solicit the existing customers who were dealing
with the firm before his retirement [sec.36(1)].
2.
The retiring partner has the right to advertise his
new business.
3.
Where a partner ceases to be a partner of the firm and there is no final settlement of
accounts, the retiring partner is entitled either
(i)
to share profits earned by the firm after his
retirement; or
(ii)
to claim interest at the rate of 6 per cent per
annum on the amount of his share in the property of the firm, whichever is
higher (sec.37).
He can claim his share out
of profits and property of the firm in an agreed ratio and can use such share
either to pay his debts or in the manner he may like.
3.11 Expulsion of a Partner (Sec. 33)
Regular Expulsion : If the expulsion of a partner is subject to
the fulfillment of following conditions, his expulsion would be a regular
expulsion. His rights and liabilities would be similar as that of a retiring
partner [sec.33(2)].
A partner may be expelled from the partnership
subject to the fulfillment of following conditions:
(i)
The power to expel a partner is available by an
express agreement between the partners.
(ii)
The power is exercised in good faith by a majority
of the partners.
(iii)
The partners being expelled, should have been given
a reasonable notice and opportunity to explain his position.
If there is a
provision in the partnership agreement that a partner may be expelled on
happening of an uncertain event, the power of expulsion can be exercised by
majority of partners in good faith.
Irregular Expulsion: Where the expulsion of a
partner does not satisfy the above three conditions, it will be treated as
irregular. In such a case, the expelled partner has the following rights:
(i)
to claim re-instatement as a partner,
(ii)
to sue for his share capital and profits in the
firm and the expelled partner does not cease to be a partner. An irregular
expulsion is wholly ineffectual and inoperative.
Liability of an Expelled Partner and the Firm
(i)
An expelled partner has to give public notice of
his expulsion. He is liable for all the acts of the firm subsequent to his
expulsion, until a public notice is given.
(ii)
If public notice is not given, the firm shall
continue to be liable for all acts subsequent to the date of expulsion, if such
subsequent acts would have been acts of the firm if done before his expulsion.
3.12 Insolvency of a Partner (Sec. 34)
When a partner
is adjudicated an insolvent, he cases to be a partner in the firm from the date
on which the order of adjudication is made, whether or not the firm is
dissolved [sec.34(1)].
Effects of the insolvency of a partner in the firm
(i)
The insolvent partner ceases to be a partner from
the date of the order of adjudicating him insolvent.
(ii)
Though the firm is dissolved on the same date,
other partners may decide that the firm shall continue.
(iii)
After the order of insolvency, the property of
insolvent partners will not be liable for the acts of the firm. A public notice
relating to the insolvency of partners is not required.
(i)
The firm is also not liable for any act of the
insolvent partners after the date of the order of adjudication [sec.34(2)].
3.13 Death of Partner [Sec. 35, 42(c)]
According to the
contract between partners, a firm may be dissolved by the death of a partner
[sec. 42(c)].
In the following
cases, death of a partner shall result in dissolution of the firm, even if the
agreement otherwise provides:
-
when all the partners die.
-
when all the partners except one die.
If the firm is not dissolved, the estate of the
deceased partner will not be liable for any act of the firm after his death
(Sec. 35).
The partnership
between the partners comes to an end. In case of death of a partner, no public
notice is required.
3.14 Transfer of Partner’s interest to outsider
(Sec. 29)
A partner may
transfer his interest in the firm by sale, charge or mortgage. But the
transferee is not entitled to:
(i)
interfere in the conduct of the firm
(ii)
require accounts of the firm
(iii)
inspect the
books of the firm.
A transferee
becomes entitled to receive the share of profit of the transferring partner and
must accept the accounts or profits agreed to by the partners [sec.29(1)].
If the
transferring partner ceases to be a partner or if the firm is dissolved, the
transferee is entitled to receive the transferring partner’s share in the
assets of the firm. He is entitled to an account as from the date of
dissolution to ascertain that share [sec.29(2)].
3.15 Rights and Duties of Partners in a
Reconstituted Firm
According to
sec. 17 of the Partnership Act, the rights and duties of the partners of the
reconstituted firm are as under:
§ Where a change
occurs in the constitution of a firm, the mutual rights and duties of the
partners in the reconstituted firm remain the same as they were immediately
before the change [sec.17(a)]
Example:
-
In case of admission of a partner, the old partners
shall continue to share the profits in the same proportion in which profits
were shared before admission of new partner.
-
In case of retirement, insolvency, death or
expulsion of a partner, the old partners shall continue to share the profits in
the same proportion in which profits were shared before retirement of such
partner.
§ Where a firm,
constituted for a fixed term, continues to carry on business after the expiry
of that term, the mutual rights and duties of the partners remain the same as
they were before the expiry, so far as they may be consistent with the
incidents of partnership at will. [sec.17(b)]
§ Where a firm
constituted to carry out one or more adventures or undertakings, the mutual
rights and duties of the partners in respect of the other adventures or
undertakings are the same as those in respect of the original adventures or
undertakings. [sec.17(c)]
For more details, refer to Mercantile law, by Asok Nadhani,
BPB Publications,www.bpbonline.com, bpbpublications@gmail.com
