CA.B.A.

SHANKAR, ACA, ACMA

Reconstitution And Dissolution Of Firm
RECONSTITUTION OF FIRM AXMISSION OF A PARTNER [Sec. 31] When can a partner be admitted to a partnership firm? A person may be admitted as a new partner (i) in accordance with the Partnership Deed. (ii) with the consent of all the existing partners, Liability of an Incoming partner: A new partner admitted into a firm is not liable for any act of the firm done before his admission. However, an incoming partner may, by an agreement, agree to become liable for the acts done before his admission, provided: (a) The newly constituted firm has agreed to pay the debts, and (b) The creditors have agreed to accept the new firm as their debtor and discharge the old firm from its liability. However, the position will be different, if a minor partner on attaining majority elects to become partner. In this case, a minor partner on attaining maturity shall be liable for all acts of the firm done since he was admitted to the benefit of the partnership and not from the date he becomes a major. RETIREMENT OF A PARTNER [Sec. 32] When can a partner retire from a partnership firm? A partner may retire (i) in accordance with the Partnership Deed, or (ii) with the consent of all the other partners, or (iii) where the partnership is at will, by giving notice in writing to all the other partners of his intention to. Liability of a Retired Partner: (i) For the Acts done before retirement: Even after retirement, a partner continue to be liable for all the acts of the firm done before his retirement, unless he is discharged. He may be discharged from liability to any third party for any acts done before his retirement, by an agreement made by him with such third party and continuing partners of the reconstituted firm. The above agreement may be express or implied. (ii) For the Acts done after retirement: As a general rule, a retired partner cannot be held liable for the acts of a firm done after his retirement. But he may be held responsible on the ground of estopple in the following cases: a) The public notice of his retirement is not given. b) The outsider has given credit to the firm on the bona fide belief that he is still the partner of the firm. c) The retired partner is not liable to any third party, who deals with the firm without knowing that he was a partner. Rights of a retired partner: 1. To carry on Competing Business (Sec. 36): A retired partner may carry on a business competing with that of the firm and he may advertise such business, but subject to a contract to the contrary, he will not (a) Use the firm name, (b) Represent himself as carrying of the business of the firm, or (c) Solicit the custom of persons, who were dealing with the firm before he ceased to be a partner. 2. To Share Subsequent Profits (Sec. 37): Where the other partners carry on the firms business without making a final settlement of the outgoing partners, then in the absence of any agreement, the outgoing partner or his legal representative shall be entitled to, at his option, to (i) such share of the profits as is proportionate to his share in the property of the firm, or (ii) interest @ 6%p.a. on the amount of his share in the property of the firm. EXPULSION OF A PARTNER [Sec. 33] When can a partner be expelled from a partnership firm? A partner may be expelled from partnership subject to the following three conditions: (1) The power of expulsion of a partner should be conferred by the Partnership Deed. (2) The power should be exercised by a majority of the partners. (3) The power should be exercised in good faith. The following three criteria are the test of good faith (a) The expulsion must be in the interest of the partnership, (b) A proper notice is served to the expelled partner, (c) He is given an opportunity of being heard.

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CA.B.A.SHANKAR, ACA, ACMA

What is irregular expulsion? If a partner is expelled without complying with the above conditions, the expulsion is called irregular. In such a case, the expelled partner may (1) Claim re-instatement as a partner, or (2) sue for the refund of his share of capital and profits in the firm. In short, in the case of irregular expulsion, the partner does not cease to be a partner. It is wholly inoperative. Further, irregular expulsion does not give right to damage to expelled partner. INSOLVENCY OF A PARTNER [Sec. 34] The legal effects of insolvency of a partner are as follows: (1) Where a partner in a firm is adjudicated insolvent, he ceases to be a partner on the date on which the order a adjudication is made. (2) The firm is dissolved on the date of the Order of adjudication, but the partners may specifically provide that on such a contingency, the firm shall not be dissolved. (3) The estate of the insolvent-partner is not liable for the acts of the firm done after the date of the order of adjudication. A public notice to the effect that a partner has been adjudicated insolvent is not required. (4) The firm is also not liable for any act of the insolvent partner after the date of the order of adjudication. DEATH OF A PARTNER [Secs. 35 and 42(c)] Same as for insolvency of a partner. Upon the death of a partner, the legal heirs do not become partners. If they want to become partners, a fresh contract has to be made, as the partnership is created by contract. TRANSFER OF PARTNERS INTEREST [Sec. 29] Meaning: When a partner agrees to share his own share in profits and assets with an outsider, it is called subpartnership and the outsider is called sub-partner. Rights of Transferee: A partner cab assign his share of the profit and his share in the assets of a firm to outsider. In that case, the Transferee is not entitled i. To interfere in the conduct of the business of the firm, or ii. To ask for the accounts of the firm, or iii. To inspect the books of the firm. But, such a transferee is entitled i. To receive the share of the profit of the transferring partner. He is bound to accept the accounts of the profit as agreed to by the partners; ii. In the case of dissolution, to receive the transferring partners share in the assets of the firm. A partner cannot assign the whole of his rights and interest in the firm to an outsider, so as to make him a partner of the firm. Where a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party or where his share has been attached under a decree, or sold for the recovery of arrears of land revenue, the Court may dissolve the firm at the instance of any other partner. Liability: This sub-partner is not liable for the debts of firm. Rights and Duties of a partner after Reconstitution (Sec. 17)

Change in constitution due to Admission/Outgoing In this case, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the change. Shankar.iyer82@gmail.com

Where the firm constituted for a fixed term continues business after the expiry of that fixed term In this case, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the expiry, so far as they may be consistent with the incidents of

Where the firm constituted to carry out one or more ventures, carries out other ventures In this case, the mutual rights and duties of the partners in respect of the other ventures remain the same as they were in thePage 2 original ventures

CA.B.A.SHANKAR, ACA, ACMA

Revocation of continuing guarantee by change in firm (Sec. 38): Where a continuing guarantee given to a firm or to a third party, and Thereafter there is change in constitution of firm, Then in the absence of agreement to the contrary, the continuing guarantee is revoked as to future transactions from the date of any change in the constitution of the firm.

DISSOLUTION OF FIRM As per Sec. 39, the dissolution of partnership among all the partners of a firm is called the dissolution of the firm. Dissolution of partnership firm: It means dissolution of partnership among all the partners of a firm. Thus, in this case, the partnership among all partners comes to an end and therefore, the business of the firm is also closed down. There are two modes of dissolution of a partnership firm: i. Dissolution without the order of the court, ii. Dissolution with the order of the court.

DISOLUTION WITHOUT THE ORDER OF THE COURT [Secs. 40 to 43] (i) Dissolution by Agreement [Sec. 40] A firm may be dissolved(a) with the consent of all the partners, or (b)as per Deed (ii)Compulsory Dissolution [Sec.41] (a) when all the partners of a firm are declared insolvent, (b) when all the partners of a firm except one are declared insolvent, (c) when the business of the firm becomes unlawful. (iii)On Happening Certain contingencies [Sec.42] Subject to the contract between the partners, a firm shall be dissolved in the following cases: (a) on the expiry of the partnership duration. (b) on the completion of the partnership adventure(s) (c) on the death of a partner (d) on the insolvency of a partner. (iv) dissolution by notice of Partnership-atwill [Sec.43]

i. ii. iii. iv.

DISSOLUTION WITH THE ORDER OF THE COURT [Sec. 44] Insanity of a partner Permanent incapacity Misconduct Persistent breach of agreement Page 3

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CA.B.A.SHANKAR, ACA, ACMA

v. vi. vii. Transfer of Interest Business working at a Loss Any other Ground RIGHTS OF PARTNERS ON DISSOLUTION Right to have Business up (Sec. 46) Right to have the debts of the firm settled out of the property of the firm (Sec. 49) Right to share personal profits earned after dissolution [Sec.50] Right to return of Premium of premature Dissolution [Sec. 51] Right where a Partnership Contract is rescinded for Fraud or Misrepresentation [Sec.52] Right to Restrain Partners from Use of Firm Name or Property [Sec.53]

i. ii. iii. iv. v. vi.

LIABILITIES OF PARTNERS ON DISSOLUTION 1. Liabilities for the acts of Partners done after Dissolution [Sec. 45] 2. Continuing Authority of Partners for Purposes of Winding Up [Sec. 47]

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