OUTGOING PARTNERS

Section 32-38 – A partner may cease to be a partner in following ways:

1. By retirement
2. By expulsion
3. By insolvency
4. By death

1. Retirement of a Partner
Retirement means voluntary withdrawal. According to the Section 32(1), a partner may retire –
a) With the consent of all the other partners. Such consent may be express or implied.
b) In accordance with express agreement by the partners.
c) Where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.
Here, a partner also has right to get the firm dissolved by giving a notice to all other partners of
his intention to dissolve the firm. – A firm is not dissolved on the retirement of a partner, if a
partner retires the partnership between remaining partners can continue and they can still carry
on the business of the firm. For this, it is necessary that after retirement, there must be at least
two remaining partners between whom the partnership is now to continue.

 Liability for acts done before retirement

If liability has arisen during the period while the person was a partner. Such liability does
not come to an end by his retirement. However, Section 32(2) states that “a retiring
partner may be discharged from the liability to any third parties for an act done before his
retirement by an agreement with the third party and the partners of the reconstituted firm.
Such an agreement may be implied by a course of dealing between such third party and
the reconstituted firm after he had the knowledge of retirement”.
Section 32(2) requires that there should be contract between all the three parties viz. the
outgoing partner, the members of reconstituted firm and the creditors. Mere agreement
between the outgoing and continuing partners that only continuing partners will be liable
for all past acts does not discharge the outgoing partner from his liability toward the
creditor. Such an agreement need not always be express, it may be implied by course of
dealing between such third party and the reconstituted from after he had knowledge of
retirement.

 Liability for act done after retirement Section 32(3) & (4)
Section 32(3): Notwithstanding the retirement of a partner from a firm he and the partners
continue to be liable to third parties 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 (dormant partner).
Section 32(4): Notice may be given by retired partner or by any partners of the
reconstituted firm.
(2)Expulsion of a partner
Section 33 provides that “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”.
Thus, two conditions are required for expulsion of a partner:
(i) The power to expel has been conferred by contract between the partners.
(ii) Such a power has been exercised in good faith. If the power to expel has been exercised
bonafide the same cannot be challenged in Court of law.

 Liability of an expelled partner

It is same as that of retired partner.
( i) Before expulsion, he continues to be liable for the acts of the firm done, unless he is
discharged from liability by following the procedure mentioned in Section 32(2) i.e. by
novation.
( ii) After expulsion, he can be made liable toward third parties for the act of firm done
unless a public notice of expulsion is been given.

3. Insolvency of a partner Section 34(1)

An insolvent is not allowed to continue as a partner and therefore a person who is adjudicated
insolvent ceases to be a partner on the date on which order of adjudication is made whether on
adjudication of partner the firm is dissolved or not depends upon the contract between partners
Section 42(d) provides unless the partners agree otherwise a firm is dissolved by adjudication of
partner as insolvent.

 Liability of an insolvent partner Section 34(2)

Where the firm is not dissolved on adjudication of a partner as insolvent and other
partners agree to continue the business. The estate of insolvent partner is not liable for the
act of the firm after the date of adjudication. In this case, he is absolved from liability for
future acts even though no public notice of his being adjudicated insolvent is given.

4. Death of a partner
Section 35 On the death of a partner, a firm is dissolved but if the other partners so agrees the
firm may not be dissolved and the business may continue with remaining partners.
The liability of a dead partner is same as that of an insolvent partner if the firm is not dissolved
on the death of the partner the estate of deceased partner is not liable for act of firm done after
his death.
No public notice is required to be given on the death of a partner.

Rights of an Outgoing Partner

(1) Right to carry on competing business Section 36(1):

An outgoing partner has a right to carry on competing business with that of the firm and he may
advertise such business but subject to three restrictions –
a) He cannot use the name of the firm.
b) He cannot represent himself as carrying on business of the firm.
c) He cannot solicit the customer or persons who were dealing with the firm. The retired partner
has the right to carry on any business competing with that of the firm.
He may set up his new business at a place next door to the firm or anywhere else. This is
necessary to assure freedom of trade to every individual. But the interest of the firm which he
has left also deserve protection. The Act therefore tries to assure that the retired partner should
do nothing to injure the interest of the firm. – The restrictions are similar to those which are
imposed on person who sells the goodwill of his business, outgoing partner is presumed to have
sold the goodwill to the remaining partner and, therefore, the restrictions stated above are
applicable to him. These restrictions are subject to contract between the outgoing and other
partners.

Section 36(2): Agreement in restraint of trade – An outgoing partner may make an agreement
with other partners that he will not carry on any business similar to that of the firm within a
specified period or within specified local limits and notwithstanding anything contained in
Section 27 of ICA such agreement shall be valid if the restrictions imposed are reasonable.
Thus the section allows restrictions on the trade liberty of the retired partner for a specified
period or specified local limits and requires that the restrictions should be reasonable.

2. Right to share subsequent profit Section 37

When a partner ceases to be a partner his share in the property of firm may not be immediately
paid to him and the firm may continue the business without any final settlement of account
between the outgoing partner or his estate and the others. In such a case, Section 37 gives
outgoing partner an option either.

To claim such share of profits made since he ceased to be a partner as may be attributable to the
use of his share of the property of firm or
To claim an interest at rate of 6% per annum on amount of his share in property of firm. This is
subject to contract between the partners to contrary.
Where by contract the surviving partners or continuing partners purchase the share of outgoing
partner/deceased partner, the right of sharing profit is lost. If, however, the partner who was to
purchase such share of outgoing or deceased partner does not comply with the terms of contract
of purchase in all material respect, he is liable to account for the right of outgoing/deceased
partner.

Revocation of continuing guarantee – Section 38

In any contract of guarantee, it is necessary that subsequent to making of a contract the term
should not be varied. Any variance in terms without surety’s consent discharges the surety from
liability as to future transaction. Similarly, in contract of continuing guarantee between a
partnership firm and third party it is expected that the constitution of the firm will remain the
same during the continuance of such a contract if there is change in constitution of the firm any
continuing guarantee is automatically revoked as to future transaction unless there is agreement
to contrary.