The Role of Incoming and Outgoing Partners in a Partnership Firm

Theoretical overview

Incoming partner

Incoming partner are the partners who are joining the firm by the partnership firm by contract or added to the firm. Incoming partner are the new partners whop gets admitted to the firm.

It is necessary that new partner should not be introduced without the consent of all the partners.

Mode of introduction of a partner:

1. With the consents of all the partners: the relationship between the partners is based on the mutual confidence and the trust. For the harmonious working of  a partnership it become necessary that the new partner should not be introduced without the consent of all the partners.
2. Introduction in accordance with a contract b/w the partners: if the contract b/w the partners permits the introduction of a new partner even without the consent of all the existing partners that can be possibly done.
3. A minor admitted to the benefit of partnership of a partner : a minor admitted to the benefit of a partner can become a partner a/c to thew procedure mentioned in the section 30(5). When the minor was admitted to the benefit of partnership he may make election within 6 month of his attaining majority.

Liability of an incoming partner:

A/c to section 25 each partner is responsible for all the acts of the firm performed while being a partner.

Incoming partner does not there by become liable for any act of the firn done before he become partner.

Outgoing partners

section 32 to 38 deals with the different ways in which a partner ceased to be a partner & his rights  and liability thereafter.

A partner ceased to be a partner in the followings ways:

1. Retirement of a partner (section 32): retirement means Voluntary withdrawal of a partner from the firm as opposed to expulsion when a partner is made to quite. The firm is not dissolved but the business with remaining partners continued.

partner may retire under certain circumstances: –

• With the consent of all other partners
• With the partners express agreement.
• In  partnership at will by a notice to all the partners

Liability of the retiring partners: a retiring partner continued to be  liable for the act of the firm done before his retirement.

 However the retiring partner also continues to be liable to third parties for the act of the firm even after the retirement if notice was not given.

2. Expulsion of a partner (section 33) : section 33 states that a partner may not be expelled from the firm by any majority of partner save in the exercise in the good faith of power conferred by contract b/w the partners. 

a/c to the provision expulsion of provision is possible in exceptional cases when the following to conditions satisfied:

• The power to expel has been conferred by a contract b/w the partners
• Such a power has been exercised in good faith.

Liability of an expelled partner:

• he continues to be liable for the acts of the firm before the expulsion 
• he can be made liable towards the third part for all the acts of the firm done after the expulsion unless a public notice of expulsion has been given.

3. Insolvency of  a partner (section 34)  Insolvent is not allowed to continue as a partner. Hence the person who is declared insolvent ceases to be a partner on the date on which the adjudication order is made. On the partner’s insolvency, whether to dissolve the firm or not it depends on a contract between the partners.
4. Death of a partner (section 35) Generally, a partnership terminates on the death of a partner, but if there is a contract between the partners to continue the partnership even after the death of the partner and the firm’s business can be continued with the remaining partners.

Rights of an outgoing partner:

Rights of outgoing partners to carry on competing for business:-

 Section 36 (1) of the Indian Partnership Act deals with the rights of the outgoing partner. 

Section 36 (2) of the Indian Partnership Act deals with the agreement in restraint of business.

 According to this section, an outgoing partner may enter into an agreement with his partners that, when he ceases to be a partner of the firm, he will not conduct related to the business within the specific limits or the limited period. This imposes some restrictions, but allows an outgoing partner to compete with this business but with some restrictions which are imposed for the same: –

1. Cannot use firm name.
2. Cannot represent yourself as member of partner.
3. Cannot solicit with the customs of the person, who was dealing with the firm before he ceased to be a partner.

Right of the outgoing partner in some cases to share future profits:– 

Section 37 deals with the rights of an outgoing partner in some cases to share future profits.

 It states that if a member of the firm dies or ceases to be a partner of the firm and another partner takes over the business if there is no final settlement between the partners; then the outgoing partner will entitle to the profit of his share, until he ceased to be a partner. The outgoing partner or his representative is entitled to use his share in the firm’s assets or interest at the rate of six percent per annum on the amount of the outgoing partner’s share in the firm. The other option for the remaining partner is to buy the stake of the deceased or outgoing partner. If the remaining partner chooses to buy a share of the outgoing partner than the outgoing partner, then the outgoing partner is no more entitled to receive a share of its profit.

Relevant sections

• A/c to section 25 each partner is responsible for all the acts of the firm performed while being a partner.
• Section 30 of the Indian Partnership Act 1932 contains legal provisions regarding a minor in a partnership
•  Section 32 Retirement of a partner: retirement means Voluntary withdrawal of a partner from the firm as opposed to expulsion when a partner is made to quite. The firm is not dissolved but the business with remaining partners continued.
• Section 33 Expulsion of a partner: section 33 states that a partner may not be expelled from the firm by any majority of partner save in the exercise in the good faith of power conferred by contract b/w the partners. 
•   Section 34 insolvency of partner 
• Section 35 death of the partner
•  Section 36 (1) of the Indian Partnership Act deals with the rights of the outgoing partner. 
• Section 36 (2) of the Indian Partnership Act deals with the agreement in restraint of business.
• Section 37 deals with the rights of an outgoing partner in some cases to share future profits.

Important case laws

1. Addanki Narayanappa and Ors. vs. Bhaskara Krishtappa and Ors

The Hon’ble Supreme Court upheld the sharing of benefits under Section 37 to the representatives of the deceased partner. However, if sharing this profit is subject to any contract to the contrary. Therefore, in cases where the firm purchases the remaining assets of the outgoing partner in the firm, then in such cases the outgoing partner are not entitled to any further profit sharing.

2. ‘Mohd. Laiquiddin and Ors. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors

The court determined that the death of a partner automatically dissolved the firm of two members. In addition, after the death of a partner, his assets are liable to the extent of the acts performed in the firm during the life of the partner. Acts done by the firm after the death of the partner have no obligation to be borne by the estate of the deceased.

Points to remember

1. incoming partner are the partners who are joining the firm by the partnership firm by contract or added to the firm. Incoming partner are the new partners who gets admitted to the firm.
2. It is necessary that new partner should not be introduced without the consent of all the partners.
3. Mode of introduction of a partner :With the consents of all the partners, the contract b/w the partner, in accordance to provision of s.30.
4. Outgoing partners: section 32 to 38 deals with the different ways in which a partner ceased to be a partner & his rights  and liability thereafter.
5. A partner ceased to be a partner in the followings ways: by retirement, by expulsion , by insolvency, by death.
6. Section 30 of the Indian Partnership Act 1932 contains legal provisions regarding a minor in a partnership. We now know that the Indian Contract Act 1857 clearly states that no person is under 18 years of age, that is, minors may be parties to a contract.
7. Minor has certain rights which he/she has to follow.