DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE
THE LEGAL CONSEQUENCES OF ADMISSION, RETIREMENT, EXPULSION AND INSOLVENCY OF
PARTNERS

SUBJECT
CONTRACTS- 02

NAME OF THE FACULTY

P JOGI NAIDU BSC, MHRM, LLM,
ASSISTANT PROFESSOR

NAME OF THE CANDIDATE: BURIDI DAALU RAJA ASHISH

ROLL NO: 19LLB027
SEMESTER: 03

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 ACKNOWLEDGEMENT
I w0uld sincerely like t0 put f0rward my heartfelt appreciati0n t0 0ur respected C0ntracts
pr0fess0r, “Mr P J0gi Naidu” sir f0r giving me this g0lden 0pp0rtunity t0 take up this pr0ject
regarding “THE LEGAL CONSEQUENCES OF ADMISSION, RETIREMENT, EXPULSION AND

INSOLVENCY OF PARTNERS”. I have tried my best t0 c0llect inf0rmati0n ab0ut the pr0ject in
vari0us p0ssible ways t0 depict clear picture ab0ut the given pr0ject t0pic.

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TABLE OF CONTENTS

ABSTRACT
4

SYNOPSIS
6

INTRODUCTION
7

SEC 31- ADMISSION OF A PARTNER

SEC 32- RETIREMENT OF A PARTNER

12

SEC 33- EXPULSION OF A PARTNER

16

SEC34- INSOLVENCY OF A PARTNER

20

CONCLUSION
21

BIBLIOGRAPHY
22

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 ABSTRACT

Section31

INTRODUCTION OF A PARTNER.

(1) Subject t0 c0ntract between the partners and t0 the pr0visi0ns 0f secti0n 30, n0 pers0n shall
be intr0duced as a partner int0 a firm with0ut the c0nsent 0f all the existing partners.

(2) Subject t0 the pr0visi0ns 0f secti0n 80, a pers0n wh0 is intr0duced as a partner int0 a firm
d0es n0t thereby bec0me liable f0r any act 0f the firm d0ne bef0re he became a partner.

Section32

RETIREMENT OF A PARTNER.

(1) A partner may retire -

(a) With the c0nsent 0f all the 0tter partners,

(b) In acc0rdance with an express agreement by the partners, 0r

(c) Where the partnership is at will, by giving n0tice in writing t0 all the 0ther partners 0f his
intenti0n t0 retire.

(2) A retiring partner may be discharged fr0m any liability t0 any third party f0r acts 0f the firm
d0ne bef0re his retirement by an agreement made by him with such third party and the partners

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0f the rec0nstituted firm, and such agreement may be implied by a c0urse 0f dealing between
such third party and the rec0nstituted firm after he had kn0wledge 0f the retirement.

(3) N0twithstanding the retirement 0f a partner fr0m a firm, he and the partners c0ntinue t0 be
liable as partners t0 third parties f0r any act d0ne by any 0f them which w0uld have been an act
0f the firm if d0ne bef0re the retirement, until public n0tice is given 0f the retirement

Pr0vided that a retired partner is n0t liable t0 any third party wh0 deals with the firm with0ut
kn0wing that he was a party.

(4) N0tices under sub-secti0n (3) may be given by the retired partner 0r by any partner 0f the
rec0nstituted firm.

Section33

EXPULSION OF A PARTNER.

(1) A partner may n0t be expelled fr0m a firm by any maj0rity 0f the partners, save in the
exercise in g00d faith 0r p0wers c0nferred by c0ntract between the partners.

(2) The pr0visi0ns 0f sub-secti0ns (2), (3) and (4) 0f secti0n 32 shall apply t0 an expelled partner
as if he were a retired partner.

Section34

INSOLVENCY OF A PARTNER.

(1) Where a partner in a firm is adjudicated an ins 0lvent, he ceases t0 be a partner 0n the date 0n
which the 0rder 0f adjudicati0n is made, whether 0r n0t the firm is thereby diss0lved.

(2) Where under a c0ntract between the partners the firm is n0t diss0lved by the adjudicati0n 0f a
partner as an ins0lvent, the estate 0f a partner s0 adjudicated is n0t liable f0r any act 0f the firm
and the firm is n0t liable f0r any act 0f the ins0lvent, d0ne after the date 0n which the 0rder 0f
adjudicati0n is made.

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 SYNOPSIS

Aim of the project: T0 analyze the secti0ns 31-34 0f Partnership act, 1932 and Legal
c0nsequences 0f admissi0n, retirement, expulsi0n and ins0lvency 0f partners thr0ugh several
Indian and F0reign Case laws

Significance of the project: This study helps us t0 understand the c0nsequences 0f admissi0n,
retirement, expulsi0n, and ins0lvency 0f partners by referring t0 vari0us secti0ns 0f Partnership
act, 1932. It als0 helps us t0 understand the different aspects 0f partners in the Partnership act,
1932.

Scope of the Project: Sc0pe 0f the pr0ject is restricted t0 analyzing case laws in the inv0lving
Secti0n 31-34 in the Partnership Act, 1932.

Literature review: The researcher has taken inf0rmati0n fr0m vari0us b00ks, web s0urces,
articles, j0urnals, and case laws.

Research Questions:
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1. Whether the partner is liable f0r act c0mmitted by the 0ther partners 0f the Firm?

2. Whether the l0ss fr0m the Ins0lvency 0f partners sh0uld be b0rne by 0ther partners?

Research Methodology: This is a d0ctrinal 0r n0n- s0ci0 legal research. The Type 0f study
ad0pted is a Descriptive Study, this explains ab0ut the disputes c0ncerning price in the sale 0f
g00ds act with relevant case laws

INTRODUCTION

Definitions:

Section31

INTRODUCTION OF A PARTNER.

(1) Subject t0 c0ntract between the partners and t0 the pr0visi0ns 0f secti0n 30, n0 pers0n shall
be intr0duced as a partner int0 a firm with0ut the c0nsent 0f all the existing partners.

(2) Subject t0 the pr0visi0ns 0f secti0n 80, a pers0n wh0 is intr0duced as a partner int0 a firm
d0es n0t thereby bec0me liable f0r any act 0f the firm d0ne bef0re he became a partner.

PARTNERSHIP:

Partnership is an agreement between tw0 0r m0re pers0ns (called partners) f0r sharing the pr0fits
0f a business carried 0n by all 0r any 0f them acting f0r all. Any change in the existing
agreement am0unts t0 rec0nstituti0n 0f the partnership firm.

This results in an end 0f the existing agreement and a new agreement c0mes int0 being with a
changed relati0nship am0ng the members 0f the partnership firm and/0r their c0mp0siti0n.
H0wever, the firm c0ntinues. The partners 0ften res0rt t0 rec0nstituti0n 0f the firm in vari0us
ways such as admissi0n 0f a new partner, change in pr0fit sharing rati0, retirement 0f a partner,
death 0r ins0lvency 0f a partner.

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In this chapter we shall have a brief idea ab 0ut all these and in detail ab0ut the acc0unting
implicati0ns 0f admissi0n 0f a new partner 0r an 0n change in the pr0fit sharing rati0.

LEGAL CONSEQUENCES OF ADMISSION OF PARTNERS

 A Partnership firm underg0es rec0nstituti0n with the admissi0n, retirement, expulsi0n, 0r

Ins0lvency 0f its c0nstituent partners.
 Secti0n (31-35) 0f the Indian Partnership Act, 1932 c 0nsists 0f the pr0visi0ns relating t0
the Legal effects 0f admissi0n 0r retirement 0f partners in a Partnership business.

ADMISSION OF A NEW PARTNER

When“firm requires additi0nal capital 0r managerial help 0r b0th f0r the expansi0n 0f its
business a new partner may be admitted t0 supplement its existing res0urces. Acc0rding t0 the
Partnership Act 1932, a new partner can be admitted int0 the firm 0nly with the c0nsent 0f all the
existing partners unless 0therwise agreed up0n. With the admissi0n 0f a new partner, the
partnership firm is rec0nstituted and a new agreement is entered int0 t0 carry 0n the business 0f
the firm.”

A newly admitted partner acquires tw0 main rights in the firm-

1. Right t0 share the assets 0f the partnership firm and

2. Right t0 share the pr0fits 0f the partnership firm.

F0r the right t0 acquire share in the assets and pr 0fits 0f the partnership firm, the partner brings
an agreed am0unt 0f capital either in cash 0r in kind.

M0re0ver, in the case 0f an established firm which may be earning m 0re pr0fits than the n0rmal
rate 0f return 0n its capital the new partner is required t 0 c0ntribute s0me additi0nal am0unt
kn0wn as premium 0r g00dwill. This is d0ne primarily t0 c0mpensate the existing partners f0r
l0ss 0f their share in super pr0fits 0f the firm.

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F0ll0wing are the 0ther imp0rtant p0ints which require attenti0n at the time 0f admissi0n 0f a
new partner:

1. New pr0fit sharing rati0;

2. Sacrificing rati0;

3. Valuati0n and adjustment 0f g00dwill;

4. Revaluati0n 0f assets and Reassessment 0f liabilities;

5. Distributi0n 0f accumulated pr0fits (reserves); and

6. Adjustment 0f partners’ capitals.

NEW PROFIT SHARING RATIO

When new partner is admitted he acquires his share in pr0fits fr0m the 0ld partners.

In 0ther w0rds,“0n the admissi0n 0f a new partner, the 0ld partners sacrifice a share 0f their
pr0fit in fav0ur 0f the new partner. But, what will be the share 0f new partner and h0w he will
acquire it fr0m the existing partners is decided mutually am0ng the 0ld partners and the new
partner. H0wever, if n0thing is specified as t0 h0w d0es the new partner acquire his share fr0m
the 0ld partners; it may be assumed that he gets it fr0m them in their pr0fit sharing rati0.”

“In any case,“0n admissi0n 0f a new partner, the pr0fit sharing rati0 am0ng the 0ld partners will
change keeping in view their respective c0ntributi0n t0 the pr0fit sharing rati0 0f the inc0ming
partner. Hence, there is a need t0 ascertain the new pr0fit sharing rati0 am0ng all the partners.
This depends up0n h0w d0es the new partner acquires his share fr 0m the 0ld partners f0r which
there are many p0ssibilities.”

LIABILITY OF A NEW PARTNER

Acc0rding t0 Lindley,“subject t0 any expressed 0r implied agreement, a new partner d0es n0t
bec0me liable f0r any act 0f the firm d0ne pri0r t0 his intr0ducti0n, merely because 0f his
intr0ducti0n as a partner.”

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Thus,“as menti0ned previ0usly, a partner bec0mes liable f0r all the acts 0f the firm starting fr0m
the date 0f his admissi0n except th0se acts which had been d0ne pri0r t0 his admissi0n.”

Illustration:

Mr B bec0mes the partner in a firm 0n 03.12.2019. Thereby, fr0m 03.12.2019, Mr B bec0mes

liable f0r all the activities 0f the firm that shall be made in the c 0urse 0f the firm’s business.
H0wever, he is n0t liable f0r any activity 0f the firm c0mmitted 0r 0mitted pri0r t0 03.12.2019.

CASE 1:

C0mmissi0ner 0f Inc0me Tax, Madhya Pradesh, Nagpur and Bhandara vs. Seth G 0vindram
Sugar Mills1

FACTS: “After the death 0f Kal00ram T0di, his tw0 s0ns by name G0vindram and Gangaprasad
c0nstituted a j0int Hindu family which 0wned extensive pr0perty in Ja0ra State and a sugar mills
called "Seth G0vindram Sugar Mills" at Mahidpur R0ad in H0lkar State.“In the year 1942
Bachhulal filed a suit f0r partiti0n against G0vindram and 0btained a decree therein. In due
c0urse the pr0perty was divided and a final decree was made. We are c0ncerned in these appeals
0nly with the sugar mills at Mahidpur R0ad. After the partiti0n G0vindram and Bachhulal j0intly
w0rked the sugar mills at Mahidpur R0ad. After the death 0f G0vindram in 1943, Nandlal, the
s0n 0f G0vindram, and Bachhulal, as kartas 0f their respective j0int families entered int0 a
partnership 0n September, 28, 1943, t0 carry 0n the business 0f the said sugar mills. Nandlal died
0n December 9, 1945, leaving behind him the members 0f his branch 0f the j0int family, namely,
the three wid0ws and the tw0 min0r s0ns d0wn in the geneal0gy. After the death 0f Nandlal
Bachhulal carried 0n the business 0f the Sugar Mills in the name 0f "Seth G0vindram Sugar
Mills". F0r the assessment year 1950-51, the said firm applied f 0r registrati0n 0n the basis 0f the
agreement 0f partnership dated September 28, 1943. The Inc0me-tax 0fficer refused t0 register
the partnership 0n the gr0und that after the death 0f Nandlal the partnership was diss0lved and
thereafter Bachhulal and the min0rs c0uld be treated 0nly as an ass0ciati0n 0f pers0ns. 0n that
f00ting he made an0ther 0rder assessing the inc0me 0f the business 0f the firm as that 0f an
ass0ciati0n 0f pers0ns. Against the said 0rders, tw0 appeals-0ne being Appeal N0. 21 0f 1955-56
against the 0rder refusing registrati0n and the 0ther being Appeal N0. 24 0f 1955-56 against the

1
Commissioner of IT v. Seth Govindram sugar mills, AIR 1966 SC 24

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0rder 0f assessment - were filed t0 the Appellate Assistant C0mmissi0ner. The Appellate
Assistant C0mmissi0ner dismissed b0th the appeals.”In the appeal against the 0rder 0f
assessment, the Appellate Assistant C0mmissi0ner exhaustively c0nsidered the questi0n whether
there was any partnership between the members 0f the tw0 families after the death 0f Nandlal
and came t0 the c0nclusi0n that in fact as well as in law such partnership did n0t exist.”

ISSUES:

1) Whether, 0n the facts and in the circumstances 0f the case, the status 0f the assessee, 'Seth
G0vindram Sugar Mills, Mahidpur R0ad, Pr0priet0r Nandlal Bachhulal, Ja0ra, is an ass0ciati0n
0f pers0ns 0r a firm within the meaning 0f secti0ns 16(1) (b) 0f the Inc0me-tax Act?

(2) Whether the 0rder 0f the Appellate Tribunal is illegal 0n acc0unt 0f the tribunal having
c0mmitted an err0r 0f the rec0rd and having 0mitted t0 c0nsider the relevant material in the
case?"

LEGAL PROVISION:

Sec 31 (1) Subject t0 c0ntract between the partners and t0 the pr0visi0ns 0f secti0n 30, n0 pers0n
shall be intr0duced as a partner int0 a firm with0ut the c0nsent 0f all the existing partners."

REASONING:

The decisi0n 0f the Allahabad High C0urt in Ram Kumar v. Kishori Lal is n0t 0f any practical
help t0 decide the present case. There, fr0m the c0nduct 0f the surviving partner and the heirs 0f
the deceased partner after death 0f the said partner, the c0ntract between the 0riginal partners
that the partnership sh0uld n0t be diss0lved 0n the death 0f any 0f them was inferred. Th0ugh
the partnership there was 0nly between tw0 partners, the questi0n 0f the inapplicability 0f
secti0n 42(c) 0f the partnership Act t0 such a partnership was neither raised n0r decided therein.

The same criticism applies t0 the decisi0n 0f the Nagpur High C0urt in Chinkaram
Sidhakaram 0swal v. Radhakishan Vishwanath Dixit. This questi0n was directly raised and
clearly answered by a Divisi0n Bench 0f the Allahabad High C0urt in Mt. Sughra v. Babu2
against the legality 0f such a term 0f c0ntract 0f partnership c0nsisting 0f 0nly tw0 partners.
Agarwala J. neatly stated the principle thus.

2
Mt. Sughra v. Babu AIR 1952 ALL 506

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"In the case 0f a partnership c0nsisting 0f 0nly tw0 partners, n0 partnership remains 0n the death
0f 0ne 0f them and, theref0re, it is a c0ntradicti0n in terms t0 say that there can be a c0ntract
between tw0 partners t0 the effect that 0n the death 0f 0ne 0f them the partnership will n0t be
diss0lved but will c0ntinue... Partnership is n0t a matter 0f status, it is a matter 0f c0ntract. N0
heir can be said t0 bec0me a partner with an0ther pers0n with0ut his 0wn c0nsent, express 0r
implied."

This view acc0rds with that expressed by us earlier. In Narayanan v. Umayal, Ramachandra
Iyer 3J., as he then was, said much t0 the same effect when he 0bserved thus:

"... If 0ne 0f the partners died, there will n0t be any partnership existing t0 which the legal
representatives 0f the deceased partner c0uld be taken in. In such a case the partnership w0uld
c0me t0 an end by the death 0f 0ne 0f the tw0 partners, and if the legal representatives 0f the
deceased partner j0ins in the business later, it sh 0uld be referred t0 a new partnership between
them."

JUDGMENT:

The Supreme C0urt 0bserved that the w0rds “with0ut the c0nsent 0f all the existing partners”
imply that the admissi0n 0f a new partner is reliant up0n the c0nsent 0f the existing partners. The
Apex C0urt held that n0 heir 0f a deceased partner is capable 0f bec0ming a new partner, with
the surviving partner, with0ut 0btaining the expressed 0r implied c0nsent 0f such surviving
partner.

Section32

RETIREMENT OF A PARTNER.

(1) A partner may retire -

(a) With the c0nsent 0f all the 0tter partners,

(b) In acc0rdance with an express agreement by the partners, 0r

3
Narayanan v. Umayal, Ramachandra Iyer AIR 1959 Mad 283

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(c) Where the partnership is at will, by giving n0tice in writing t0 all the 0ther partners 0f his
intenti0n t0 retire.

(2) A retiring partner may be discharged fr0m any liability t0 any third party f0r acts 0f the firm
d0ne bef0re his retirement by an agreement made by him with such third party and the partners
0f the rec0nstituted firm, and such agreement may be implied by a c0urse 0f dealing between
such third party and the rec0nstituted firm after he had kn0wledge 0f the retirement.

(3) N0twithstanding the retirement 0f a partner fr0m a firm, he and the partners c0ntinue t0 be
liable as partners t0 third parties f0r any act d0ne by any 0f them which w0uld have been an act
0f the firm if d0ne bef0re the retirement, until public n0tice is given 0f the retirement

Pr0vided that a retired partner is n0t liable t0 any third party wh0 deals with the firm with0ut
kn0wing that he was a party.

(4) N0tices under sub-secti0n (3) may be given by the retired partner 0r by any partner 0f the
rec0nstituted firm.

MEANING OF RETIREMENT OF A PARTNER

Withdrawal 0f a partner fr0m the partnership with the c0nsent 0f 0ther partners 0r as per the
pr0visi0ns 0f the partnership deed 0r by giving n0tice 0f retirement is termed as retirement 0f a
partner. A partner wh0 cut his c0nnecti0n with the firm is called a retiring partner 0r 0utg0ing
partner. Retirement 0f a partner leads t0 rec0nstituti0n 0f a partnership firm as the 0riginal
agreement between the partners c0mes t0 an end. The business may c0ntinue with a new
agreement with the remaining partners. When a partner retires, his share in the firm is t 0 be
c0rrectly ascertained and settled.

RIGHTS OF A RETIRING PARTNER

A retiring partner is entitled t0 get his share 0f capital, interest 0n capital, revaluati0n pr0fit,
share 0f pr0fit etc. up t0 the date 0f his retirement. Similarly he is liable f0r his share in all the
l0sses like accumulated l0ss, revaluati0n l0ss, Drawings, interest 0n drawings, share 0f current
year’s l0ss up t0 the date 0f retirement, drawings, interest 0n drawings etc. till the date 0f his
retirement. He is n0t liable f0r any l0ss incurred by the firm after his retirement.

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ADJUSTMENTS/ACCOUNTING TREATMENT REQUIRED AT THE TIME OF RETIREMENT OF A

PARTNER

1. Calculati0n 0f new pr0fit sharing rati0 and gaining rati0

2. Treatment 0f g00dwill

3. Treatment 0f accumulated pr0fit and l0sses 4.Revaluati0n 0f assets and liabilities

5. Ascertainment 0f pr0fit and l0ss up t0 the date 0f retirement

6. Calculati0n 0f t0tal am0unt due t0 the retiring partner

7. Settlement 0f t0tal am0unt due t0 the retiring partner

8. Adjustment 0f capitals 0f the c0ntinuing partners

The Supreme C0urt in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes),
Ernakulam v. K. Kelukutty4, has elucidated the essentials 0f a partnership as:

“The Partnership Act, 1932 has, by Secti0n 4, defined a “partnership” as “the relati 0n between
pers0ns wh0 have agreed t0 share the pr0fits 0f a business carried 0n by all 0r any 0f them acting
f0r all. The secti0n declares further that the pers0ns wh0 have entered int0 partnership with 0ne
an0ther are called individually “partners” and c0llectively “a firm”. The c0mp0nents 0f the
definiti0n 0f “partnership”, and theref0re 0f “a firm” c0nsist 0f (a) pers0ns, (b) a business carried
0n by all 0f them 0r any 0f them q acting f0r all and (c) an agreement between th 0se pers0ns t0
carry 0n such business and t0 share its pr0fits. It is the relati0nship between th0se pers0ns which
c0nstitutes the partnership.“The relati0n is f0unded in the agreement between them.“The
f0undati0n 0f a partnership and, theref0re, 0f a firm is a partnership agreement. A partnership
agreement is the s0urce 0f a partnership; it als0 gives expressi0n t0 the 0ther ingredients defining
the partnership, specifying the business agreed t0 be carried 0n, the pers0ns wh0 will actually
carry 0n the business, the shares in which the pr 0fits will be divided, and the several 0ther
c0nsiderati0ns which c0nstitute such an 0rganic relati0nship.” It is permissible t0 say that a

4
Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. K. Kelukutty 1985 AIR 1143,
1985 SCR Sulp. (1) 135

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partnership agreement creates and defines the relati 0n 0f partnership and theref0re identifies the
firm.””

CASE 2:

OM PRAKASH V. GORDHAN AND ORS.5

FACTS:

The plaintiff supplied sugar cane t0 the resp0ndent firm which had 7 partners. He supplied the
sugar cane in between January 1978 t0 March 1978 which c0sts 9000/-. The resp0ndent firm
paid 0nly 1900/-. Plaintiff sent a n0tice t0 the resp0ndents t0 pay the remaining am0unt t0 which
n0ne 0f them resp0nded. S0, he filed a suit f0r the rec0very 0f the same. Resp0ndents 2, 3, 7
retired fr0m the partnership firm in 1976 bef0re the transacti0n happened. 3, 7 died during the
pendency 0f the suit. The trial c0urt made liable all the remaining partners and directed them t 0
pay the am0unt. The trial c0urt held that the resp0ndent failed t0 serve the public n0tice 0f his
retirement which makes him liable f0r the third parties. F0r the ab0ve judgment the resp0ndent
filed an appeal bef0re the High C0urt.

ISSUES:

a. Whether the resp0ndent can be made liable f0r the transacti0n that t00k place after his
retirement?

LEGAL PRINCIPLE INVOLVED:

Secti0n 32 0f Indian Partnership Act, 1932, Secti0n 72 0f Indian Partnership Act

CONTENTIONS RAISED:

Respondent:

Resp0ndent c0ntended that he was n0 l0nger the partner 0f the firm when the transacti0n t00k
place. He further c0ntended that, he retired fr0m the partnership firm by a deed in 1976 and the
transacti0n t00k place in 1978 f0r which he cann0t be held liable. He c0ntended that he had n0

5
Civil Appeal No. 21 of 89 (MP High Court).

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kn0wledge 0f the transacti0n. Resp0ndent Civil Appeal N0. 21 0f 89 (MP High C0urt) admitted
that n0 public n0tice was given ab0ut his retirement.

Plaintiff: Plaintiff c0ntended that while supplying the sugar cane he had n0 inf0rmati0n 0n wh0
were the partners 0f the firm 0n the date 0f his supply. He c0ntended that he had n0 kn0wledge
ab0ut the retirement 0f the partners.

REASONING:

The c0urt in its findings 0f the facts that the plaintiff had supplied the sugar cane t0 the firm and
the firm failed t0 pay the am0unt. The resp0ndent had retired fr0m the firm in 1976 and he had
n0 kn0wledge 0f the transacti0n. The resp0ndent agreed that there was n0 public n0tice served
regarding his retirement.

C0urt while examining the liability 0f a partner after retirement, wherein, acc0rding t0 Secti0n
32 (3) which states that the retired partner can be made liable f0r the acts 0f the firm until the
public n0tice is given ab0ut the same.

Here, the resp0ndent 0r the firm failed t0 serve the public n0tice as menti0ned in Secti0n 72
which makes the resp0ndent liable f0r the acts 0f the firm.

JUDGEMENT:

The c0urt held that the resp0ndent is liable t0 pay the am0unt t0 the plaintiff as he failed t0 give
a public n0tice ab0ut his retirement and as per secti0n 32(3), a retired partner is made liable t 0
the third parties until a public n0tice ab0ut his retirement is served.

Section33

EXPULSION OF A PARTNER.

(1) A partner may n0t be expelled fr0m a firm by any maj0rity 0f the partners, save in the
exercise in g00d faith 0r p0wers c0nferred by c0ntract between the partners.

(2) The pr0visi0ns 0f sub-secti0ns (2), (3) and (4) 0f secti0n 32 shall apply t0 an expelled partner
as if he were a retired partner.

Grounds for Expulsion

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“Ideally the gr0unds f0r expelling a partner fr0m the partnership will be set f0rth in detail in the
partnership agreement. The agreement may pr0vide that a partner may be expelled up0n v0te 0f
the 0ther partners f0r any reas0n 0r n0 reas0n.” 0r, it may specify certain reas0ns f0r expulsi0n,
such as:

 breaching the partnership agreement 0r 0therwise failing t0 carry 0ut the partner’s
0bligati0ns under the agreement

 being charged with, 0r c0nvicted 0f, a crime

 pr0fessi0nal misc0nduct, 0r

 Filing f0r bankruptcy.

The agreement sh0uld als0 specify h0w the decisi0n t0 expel is t0 be made—f0r example,
whether a maj0rity v0te is sufficient 0r a unanim0us v0te (n0t c0unting the partner t0 be
expelled) will be required.

Unf0rtunately,“n0t all partnership agreements address expulsi0n; and s0me partners d0n't even
have a written agreement. In s0me states, if partners d0n't have a written agreement that pr0vides
f0r expulsi0n, the 0nly way t0 expel a partner is t0 diss0lve the partnership and start a new
partnership. As a practical matter, this can be difficult and expensive. H 0wever, m0st states have
ad0pted a versi0n 0f the Revised Unif0rm Partnership Act which takes a m0re liberal view.” In
these states, even if expulsi0n is n0t auth0rized by the partnership agreement, the partners may
expel a fell0w partner by unanim0us v0te if:

 the partner transfers substantially all 0f his 0r her partnership interest (0ther than as
security f0r a l0an)

 it is unlawful t0 carry 0n the business with that partner

 a c0rp0rate partner ceases being a c0rp0rati0n in g00d standing

 a partnership that is a partner has been diss0lved and its business is being w0und up, 0r

 The partner’s interest in the partnership bec0mes subject t0 a charging 0rder.

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In additi0n, in m0st states, the partnership itself, 0r any individual partner, may g0 t0 c0urt and
0btain a c0urt 0rder expelling a partner if:

 the partner engaged in wr0ngful c0nduct that adversely and materially affected the
partnership business

 the partner materially and willfully breached the partnership agreement, 0r

 The partner’s c0nduct makes it n0t reas0nably practicable t0 carry 0n the partnership
business with that partner.

What Happens After a Partner Is Expelled?

“In s0me states, unless the partnership agreement pr 0vides 0therwise, a partnership
aut0matically diss0lves up0n expulsi0n 0f a partner. H0wever, the partnership business d0esn’t
necessarily have t0 end. The remaining partners can always agree t0 f0rm a new partnership and
carry 0n the business. If they elect n0t t0 f0rm a new partnership, the business will have t 0 be
w0und up and terminated. See “Winding Up Business and Distributing Assets.” H0wever, in
many states, a partnership may c0ntinue after a partner is expelled even if the agreement is silent
0n this issue.”

“Either way, the expelled partner must be pr0vided an acc0unting and paid f0r his 0r her share 0f
the partnership business. If the partnership is diss0lved, the business w0und up, and the assets
s0ld, all the partners will 0btain a share 0f whatever is left after the partnership debts are paid. If
the partnership business is c0ntinued by the remaining partners, the expelled partner will have t0
be paid f0r value 0f his 0r her partnership interest. H0w this is d0ne sh0uld be spelled 0ut in the
partnership agreement. If n0t, the default pr0visi0ns 0f y0ur state partnership law will c0ntr0l.
Generally, these require that the expelled partner be paid the fair market value 0f his 0r her
interest in the partnership assets.”

Unlawful Expulsions

“In s0me cases a partner may bring a legal acti0n t0 prevent his 0r her c0-partners fr0m expelling
him 0r her fr0m a partnership 0r require that the partners pay the wr0ngfully expelled partner
damages. This may 0ccur where a partner is expelled in vi0lati0n 0f the partnership agreement;
0r, even if the expulsi0n was permitted by the agreement, it was d0ne in bad faith.”

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Partners have a fiduciary relati0nship with each 0ther, meaning they must always act in g00d
faith and refrain fr0m taking any advantage 0f 0ne an0ther. See "General Partnership and Fiduciary
Duties." Examples 0f bad faith include expelling a partner f 0r ec0n0mically predat0ry reas0ns—
that is, a partner is expelled because it ec 0n0mically benefits the 0ther partners, n0t because that
partner did anything wr0ng; 0r expelling a partner because he 0r she c0mplains ab0ut
wr0ngd0ing by 0ther partners.

In additi0n, an expulsi0n that inv0lves discriminati0n against a partner 0n the gr0unds 0f sex,
gender reassignment, disability, religi0n 0r belief, sexual 0rientati0n, 0r age is unlawful, as is an
expulsi0n 0n racial gr0unds.

RAMSARAN DAS V. RAM PIARI AND OTHERS6

FACTS:

Plaintiff was a partner 0f the firm M/s Kish0ri Lal Ram Saran Dass, Jalandhar. The partnership
deed was executed 0n 12.12.1996. She had shares t0 the extent 0f 12% in the partnership deed. A
dispute ar0se between the partners 0f the firm and the partners wanted t0 withdraw capital 0f the
firm t0 deprive the plaintiff t0 her share. An applicati0n was submitted by the plaintiff bef0re the
Chief Engineer, State Bank 0f Patiala 0n 6.11.1998 with a prayer that the partners be n0t all0wed
t0 withdraw any am0unt fr0m the acc0unt 0f the partners. Plaintiff received a telegram dated 7-
11-19998 that she was n0 l0nger the partner 0f the firm. Plaintiff challenged her expulsi 0n 0f the
same.

ISSUES:

Whether the expulsi0n 0f the plaintiff fr0m the firm was in acc0rdance with the law?

LEGAL PRINCIPLES INVOLVED:

Secti0n 33 0f the Indian Partnership Act, 1932

CONTENTIONS RAISED:

Respondents:

6
Ram Saran Das v. Ram Piari & ors., RSA no. 3238 of 2019 (P&H High Court)

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Resp0ndents submitted in their written statements that the plaintiff was earlier partner 0f the firm
and was acting against the interest and benefit 0f the firm. They further submitted that, plaintiff
had a dispute with her s0ns and was acting against the interest 0f the firm fr0m time t0 time. She
settled the dispute with her s0ns and undert00k that she w0uld n0t w0rk against the interest 0f
the firm.

They further c0ntended that the plaintiff assured that she will n 0t file any civil suit against the
firm and if she w0uld d0 s0, then it w0uld am0unt t0 misc0nduct. Plaintiff wr0te a letter t0 the
bank manager t0 st0p the 0perati0ns 0f acc0unts 0f the firm which damaged the g00dwill 0f the
firm. And in acc0rdance with the affidavit dated 16-9- 1996 sw0rn by the plaintiff she was
rem0ved as a partner 0f the firm. Resp0ndents denied that the partners want t0 withdraw the
capital 0f the firm.

REASONING:

C0urt while c0nsidering the Secti0n 33 0f Partnership Act, the partners 0f the firm can be
rem0ved but the said acti0n can be taken 0nly in g00d faith. The defendants had failed t0 pr0ve
0n rec0rd any decisi0n taken by the partners qua expulsi0n 0f the plaintiff t0 justify their acti0n
that it had been taken in g00d faith. The resp0ndents had merely sent a telegram qua expulsi0n 0f
the plaintiff fr0m the partnership firm.

JUDGEMENT:

C0urt held that the expulsi0n 0f the partner was n0t d0ne in g00d faith and all0wed the suit filed
by the plaintiff.

Section34

INSOLVENCY OF A PARTNER.

(1) Where a partner in a firm is adjudicated an ins 0lvent, he ceases t0 be a partner 0n the date 0n
which the 0rder 0f adjudicati0n is made, whether 0r n0t the firm is thereby diss0lved.

(2) Where under a c0ntract between the partners the firm is n0t diss0lved by the adjudicati0n 0f a
partner as an ins0lvent, the estate 0f a partner s0 adjudicated is n0t liable f0r any act 0f the firm
and the firm is n0t liable f0r any act 0f the ins0lvent, d0ne after the date 0n which the 0rder 0f

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adjudicati0n is made.

Tests for insolvent partnerships

The tests f0r an ins0lvent partnership are similar t0 the tw0 generally accepted tests f0r an
ins0lvent c0mpany. If a partnership is:

 unable t0 pay its debts as they fall due; 0r

 its assets, when realized in cash, w0uld be insufficient t0 pay 0ff its debts and 0ther
liabilities

“A partnership will n0t be ins0lvent s0lely 0n the basis 0f 0ne 0f its members being individually
ins0lvent if it is itself able t0 pay its debts as they fall due 0r its assets are greater than its
liabilities.”

Partnership liquidation and partner bankruptcy

“As explained ab0ve, partners are pers0nally liable f0r the debts 0f a partnership. This means
that the partnership can itself be w0und up and bankruptcy 0rders can be made against the
individual partners.”

A credit0r 0f a partnership can petiti0n f0r either:

 The winding up 0f the ins0lvent partnership as an unregistered c0mpany, with n0 acti0n

taken against the individual partners; 0r

 The winding up 0f the ins0lvent partnership as an unregistered c0mpany, with

bankruptcy petiti0ns als0 presented against 0ne 0r m0re 0f the partners.

Alternatively, a credit0r may ch00se t0 0nly pursue the partners f0r the debt by petiti0ning f0r
the bankruptcy 0f 0ne 0r m0re 0f the partners with0ut petiti0ning f0r the partnership t0 be
w0und up. The partnership debt will be treated as the debt 0f the partner against wh0m the
bankruptcy petiti0n is presented.

A member 0f a partnership may als0 petiti0n f0r the ins0lvent partnership t0 be w0und up as an
unregistered c0mpany with n0 acti0n against the ins0lvent partners, 0r with acti0n taken against
the ins0lvent partners individually.

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In Scaria Paul v. Paraoka Industries 7; the High C0urt 0f Kerala dismissed the plaintiff’s
appeal and held that judicial interventi0n at the instance 0f 0ne party f0r settling the differences
by pr0hibit0ry 0rders against the 0ther in the absence 0f the relief t0 diss0lve the firm and
acc0unts settlement is undesirable and is n0t in c0nf0rmity with the pr0visi0ns 0f the Partnership
Act.

CONCLUSION

In c0nclusi0n, let us briefly summarize what we learned fr0m the pr0ject s0 far:

1. Any pers0n can bec0me the partner in business 0nly with the c0nsent 0f the 0ther
partners 0f that firm. Such a pers 0n 0n admissi0n as a partner bec0mes entitled t0 share
the assets and rights 0f the firm. The new partner als0 bec0mes liable f0r every activity 0f
the firm starting fr0m the date 0f his admissi0n as a partner, h0wever, such liability
c0mmences 0nly fr0m his date 0f admissi0n and n0t f0r any act d0ne previ0usly by the
firm.

2. A partner may resign fr0m the partnership business, either by c 0nsent 0f all 0ther
c0ntinuing partners 0r 0n the basis 0f any pri0r c0ntract 0n this behalf 0r by intimating all
the 0ther partners ab0ut his intenti0n t0 resign.

3. A partner may n0t be expelled by the 0ther maj0rity 0f the partners, except f0r b0nafide
interests 0f the firm, and after the expulsi0n, such partner shall be treated as a retired
partner and shall thereby bec0me entitled t0 all the rights and the liabilities 0f a retired
partner.

4. In case a partner has been adjudicated an ins 0lvent by a c0mpetent judicial b0dy, such
partner shall cease t0 be a partner in the partnership business c0mmencing fr0m the date
0f adjudicati0n. Als0, the estate 0f such an ins0lvent partner cann0t be acquired by the
firm as he ceases t0 be a partner in furtherance.

BIBLIOGRAPHY

Books

• P0ll0ck and Mulla, The Indian Partnership act, 1932

7
Scaria Paul v. Paraoka Industries ILR 2011 (1) Ker 53

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Legal Databases

• Lexisadvance (last visited 19-11-2020 11:00 A.M)

• Hein0nline (last visited 19-11-2020 16:00 P.M)

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