CENTRAL UNIVERSITY OF SOUTH BIHAR

GAYA 824236

Incoming and outgoing partners under

partnership act, 1932

School of Law and Governance

Submitted to: - Name- Jata Shankar

Mrs. Meenakshi Kumari CUSB1713125017

[Incoming and outgoing partners under partnership act, 1932] Page1
 ACKNOWLEDGEMNT

Every project big or small is successful largely due to the effort of a number of wonderful souls
who have always given their valuable advice and lent their helping hands.

I owe my sense of gratitude to almighty god for showing his blessing throughout the completion
of this project. I am highly indebted to “Mrs. Meenakshi Kumari” for her guidance and constant
supervision as well as for providing necessary information regarding the project during class
lectures. However, it would not have been possible without the kind support and help of many
individuals and organizations. I would also like to extend my gratitude to my colleague,
librarian, and non- teaching staff who have willingly helped me out with their abilities. This
research would not have been possible without all mentioned above. The subject matter of the
project work is very revolutionary and it helped me a lot to know and learn about sections and
provisions mentioned under Indian Partnership Act, 1932.

Last but not the least I place a deep sense of gratitude to my family members who has been
constant source of inspiration during the presentation of this project.

Jata Shankar

[Incoming and outgoing partners under partnership act, 1932] Page2

 CHAPTERISATION

CHAPTER I :- Introduction, Research Methodology, Scope & Objective

Scope ---------------------------------------------------------------------------------------------------------- 4

Research Methodology & Objective -------------------------------------------------------------------- 5

Introduction-------------------------------------------------------------------------------------------------- 6

CHAPTER II: - Incoming of Partners

Introduction of new partners -------------------------------------------------------------------------- 7-9

Liability of an Incoming Partner ----------------------------------------------------------------- 9-10

Break in Identity of Firm by Addition of New Partners--------------------------------------- 10-11

CHAPTER III: - Outgoing of Partners

Ways of outgoing of partners------------------------------------------------------------------------12-15

CHAPTER IV: - Rights and Liability of Incoming & Outgoing partners

Rights, remedies and Liabilities of outgoing partners----------------------------------------- 16-18

CHAPTER V: - Inference

Conclusion, References------------------------------------------------------------------------------- 19-20

[Incoming and outgoing partners under partnership act, 1932] Page3

CHAPTER I :- Introduction, Research Methodology, Scope & Objective

SCOPE

This project is concerned about the provisions related to The Indian Partnership Act, 1932; it
deals with the incoming and outgoing of partners under the above mentioned Act. It also talks
about the evolution in the understanding of liabilities and remedies of outgoing and incoming
partners with the help of case laws.

[Incoming and outgoing partners under partnership act, 1932] Page4

RESEARCH METHODOLOGY

Subject: Law of Contract II

Topic: Incoming and outgoing partners under partnership act, 1932
The research method which I opted for doing this project is Doctrinal research from primary and
secondary sources. I researched on web database having articles and reports related to my topic.
In addition to that, I also referred books available on Partnership Act. This research is descriptive
and analytical in nature. Footnotes have been provided wherever needed to acknowledge the
source.

OBJECTIVES

To discuss about the incoming and outgoing partners under partnership Act.

To study and discuss about the procedure of the above mentioned.

To discuss the Uberrima fides relationship between the partners.

To study the evolution in the sense of understanding the liabilities and remedies provided yo
the partners.

[Incoming and outgoing partners under partnership act, 1932] Page5

Introduction

The law of partnership is contained in The Indian Partnership Act, 1932, which came into force
on 1st October 1932. The act is mainly based on English Partnership act 1890 and practically
codifies the Indian law of partnership.

Partnership is defined under Sec- 4 of this act:

“Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.”

In the age of globalization, at most of the times it is imperative to establish a contractual

relationship among individuals for the purpose of establishment & regulation of a corporation or
an organization as the case may be. For the legalization of the same, The Indian Partnership Act,
1932 aids for. This establishes a commercial relationship between the parties and this
relationship is mostly regulated by their mutual contracts in presence of a contract, or by The
Indian Partnership Act otherwise. Thus The Indian Partnership Act, 1932 works as a mechanism
of check and balance for a partnership contract at the same time it came up with few regulatory
provisions in absence of such precisely defined contracts.

Incoming and outgoing partners is defined under Chapter V of The Indian Partnership Act, 1932.
It prescribes the mode of introduction of new partner and their liability; it also defines the
procedures and requirements to take break from their contractual relationship.

[Incoming and outgoing partners under partnership act, 1932] Page6

CHAPTER II: - Incoming of Partners

Introduction of new partners: -

Object of section 31(1): The general idea behind section 31(1) of the Act is that the consent of
all the existing partners is required to the introduction of a new partner so that the firm may work
harmoniously. A new partnership may be by an oral agreement or in writing.1

Modes of introduction of a partner:

A new partner can be introduced into a firm in the following ways:

1) With the consent of all the existing partners;

2) In accordance with a contract between the partners;

3) In accordance with the provisions of s 30. 2

1
Meenakshi Achi v. P.S.M.S Chettiar, AIR 1957 Mad 8.
2
The Indian Contract Act. Author, R K Bangia. Edition, 7. Publisher, Allahabad Law
Agency,2017, pg no- 252,253

[Incoming and outgoing partners under partnership act, 1932] Page7

1) Introduction with the consent of all the partners: - The relationship between the partners is
based upon mutual confidence and trust. For the harmonious working of a partnership, it
becomes necessary that a new partner should not be introduced without the consent of all the
partners. This section, therefore, provides the general rule that no person shall be introduced as a
partner into the firm without the consent of all the existing partners.

2) Introduction in accordance with a contract between the partners: - The rule stated above is
subject to contract between the partners. If a contract between the partners permits the
introduction of a new partner even without the consent of all the existing partners, which can
possibly be done. For example, the contract provides the majority of the partners shall be
competent to admit a new partner or anyone of them may nominate a partner or appoint his
successor, a new partner could be introduced accordingly.

In such cases, even if some of the partners are unwilling to the introduction of some particular
person, they will be bound by their contract and the introduction will be valid. The position as
explained in Lovergrove v Nelson,3 is: “To make a person a partner with 2 others, their consent
must clearly be had, but there is no particular mode or time required for giving that consent; and
if three persons enter into partnership by a contract which provides that, on one retiring, one of
the remaining two, or even a fourth person, who is no partner at all, shall name the successor to
take the share of one retiring, it is clear that this would be a valid contract which the court must
recognize and the new partner would come in as entirely by the consent of the other two, as if
they had adopted him by name.”

3
(1834) 3 My & K 120.
[Incoming and outgoing partners under partnership act, 1932] Page8
In Byrne v Reid,4 A, B, C and D were four partners and they, in their partnership deed,
authorized A to admit his son, S into partnership when S had attained the age of twenty-one
years. After S attained the age of twenty-one years, A nominated him as a partner in accordance
with the partnership deed and he accepted the nomination, but the other partners refused to
recognize him as a partner. It was held that the son on accepting the nomination had become a
partner.

3) A minor admitted to the benefits of partnership becoming a partner A minor admitted to the
benefits of partnership can become a partner according to the procedure mentioned in s 30 (5).
When a minor was admitted to the benefits of partnership, he may make an election, within 6
months of his attaining the majority or obtaining knowledge that he had been admitted to the
benefits of partnership, whichever date is later, and give a public notice whether he became a
partner or not. If he opts to become a partner by such notice, he becomes a partner of the firm. If
he fails to give such notice within the above stated time, then on the expiry of such time, he
automatically becomes a partner. It may be noted that in case of such a minor becoming a
partner, the consent of other partners is not required. 5

Liability of an Incoming Partner

It has already been observed that according to s 25: “Every partner is liable… for all the acts of
the firm done while he is a partner.” S 31 (2) confirms this rule and states an incoming partner
“does not thereby become liable for any act of the firm done before he became a partner.” It is

4
(1902) 2 Ch. 735.
5
The Indian Contract Act. Author, R K Bangia. Edition, 7. Publisher, Allahabad Law
Agency,2017, pg no-,253

[Incoming and outgoing partners under partnership act, 1932] Page9

clear that as a general rule the liability of an incoming partner begins from the date of his joining
the firm.

Nothing can, however, prevent a partner from agreeing to be liable for the acts done before his
admission. If he makes such an agreement with his co-partners, the same will be binding only
between him and the co-partners and the third parties cannot take advantage of such an
agreement. The creditors can make him liable if they can show that the incoming partner had
agreed with them, expressly or impliedly, for being liable towards them for the acts done before
his admission. The basis of liability for the past acts in such a case will be the agreement rather
than the fact of his admission as a partner.

Central Bank of India v Tarseema Compress Wood Mfg. Co.6, after a 4th partner was
admitted to a partnership firm, which earlier consisted of only three partners, all of them gave the
following undertaking to the bank:

“We are jointly and severally responsible to the bank for the liabilities of the firm with the bank.
The bank may recover its claim and dues from any or all of the partners of the firm and the assets
of any deceased partner.”

The fourth partner in this case had undertaken liability which existed prior to his joining the firm
and he was, therefore, held to be jointly and severally liable in respect of such liability.

The position of a minor becoming a partner under s 30 is, however, different. His liability
towards third parties does not commence from the date of his becoming a partner, but it relates
back to the date of his admission to the benefits of partnership.7

6
AIR, 1997, Bombay-225
7
The Indian Contract Act. Author, R K Bangia. Edition, 7. Publisher, Allahabad Law
Agency,2017, pg no- 254

[Incoming and outgoing partners under partnership act, 1932] Page10

Introduction of a new partner- Liability of incoming partner in respect of pre-existing debts

New partner could be held liable if he had assumed liability and creditor had accepted him as
debtor. Documents on record showed that new partner had acknowledged pre-existing liability
and was also trying to clear the dues. Act of Bank in not withdrawing facilities of newly
constituted firm proved that Bank wished that it should assume the liabilities. Therefore, new
partner was liable to pay the pre-existing debts. The fact that new partnership deed did not
provide for assumption of such liability was immaterial.

Break in Identity of Firm by Addition of New Partners

Whenever the constitution of a firm changes by addition of new members as partners, there is a
break in the identity of the firm whether or not the name continues to be the same. After a change
in the constitution of the firm by addition of new partners what formerly was the property of the
old firm does not continue to be the property of the old firm. When the change in the constitution
is merely a paper transaction and not a genuine and real transaction, the court would disregard
the change in the constitution of the firm and would regard the property of the old firm in spite
of the apparent though real, change in the constitution. Where, however, there is a real change in
the constitution and the new firm is a new identity there seems to be no justification for the view
that whatever was the part of the property of the old firm continues to be its property in spite of
such change. If the properties could not reach in the hands of the old firm, it could not be
attached obviously in the hands of the new firm.8

CHAPTER III: - Outgoing of Partners

8
Gouri Sankar v. CM, Bank Ltd., AIR 1959 Cat 262.

[Incoming and outgoing partners under partnership act, 1932] Page11

Ss 32 to 38 deal with different ways in which a partner may cease to be a partner and his rights
and liabilities thereafter. These provisions pertain to situations when the outgoing partner ceases
to be a partner, but the firm is not dissolved and it continues with the remaining partners. A
partner may cease to be a partner in the following ways:

a) By retirement; b) By expulsion; c) By insolvency; d) By death

a) Retirement of a Partner (S 32) Retirement here means voluntary withdrawal of a partner from
the firm, as opposed to expulsion, when a partner is made to quit. It covers such cases where on
the withdrawal of a partner from the firm, the firm is not dissolved but the business of the firm is
continued with the remaining partners.

Retirement of partner: - Use of the word “retire” in s 32 of the Partnership Act, 1932 is
confined to cases where a partner withdraws from a firm and the remaining partners continue to
carry on the business of the firm without dissolution of partnership as between them.

According to section 32(1),a partner may retire- a) With the consent of all the other partners, b)
In accordance with an express agreement by the partners, or c) Where the partnership is at will,
by giving notice in writing to all the other partners of his intention to retire.

Liability for acts done after retirement [s 32 (2)] Every partner is liable for all acts of the firm
done while he is a partner.8 If liability has arisen during the period while a person was a partner,
such liability does not come to an end by his retirement. According to s 32 (2), however, there is
a possibility of discharge of the outgoing partner from liability for the past acts,

By retirement a person ceases to be a partner. The third parties can still presume mutual agency
between the outgoing and the continuing partners until a public notice of retirement is given. S
32 (3), therefore, provides that in the absence of a public notice, the outgoing partner and the
continuing partners continue to be liable for the act of each other towards third parties. In order
to avoid such liability, it is in the interests of both the retiring and the continuing partners that

[Incoming and outgoing partners under partnership act, 1932] Page12

public notice is given. It has, therefore, been provided in sub-sec. (4) that such a notice may be
given either by the retired partner or any partner of the reconstituted firm.

b) Expulsion of a partner (S 33):

It has been expressly provided by s 33 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.”

According to the provision, the expulsion of a partner is possible, in exceptional cases, when the
following two conditions are satisfied:

1. The power to expel has been conferred by a contract between the partners, and

2. Such a power has been exercised in good faith.

No expulsion is possible unless a power to that effect has been conferred by a contract. This
power must be exercised in good faith for the general interest of the whole firm. If the power to
expel has been exercised bona fide the same cannot be challenged in a court of law. In Blissett v
Daniel,9 according to the partnership agreement two-third or more of the partners were
empowered to expel a partner by a notice, without assigning any reason for the same. Two-third
of the partners signed and served a notice of expulsion on one of them. It was found that the real
reason for such a notice of expulsion was not to protect any commercial interest of the firm but
that the partner sought to be expelled had opposed the appointment of a co-partner‟s son as co-
manager with his father. It was also found that the offended father was instrumental in managing
the expulsion. It was held that notice of expulsion given under the circumstances was void.

Expulsion of a partner, who has been held guilty of an offence, has been considered to be
justified. In Carmichael v Evans,10 the power to expel existed against any partner who was

9
(1853) 10 Hare 493
10
(1904) 1 Ch. 486

[Incoming and outgoing partners under partnership act, 1932] Page13

addicted to scandalous conduct detrimental to the partnership business or was guilty of any
flagrant breach of duties relating to a partnership business. One of the partners was convicted for
travelling without a ticket, and he was given a notice of expulsion by the other partner. It was
held that the notice of expulsion given under these circumstances was justified.

Liability of an expelled partner: -

As regards liability towards third parties for act of the firm done either before or after expulsion,
the position of the expelled partner is exactly the same as that of a retired partner. It means that:

i) He continues to be liable for the acts of the firm done before his expulsion, unless he is
discharged from liability by following the procedure mentioned in s 32 (2); and ii) He can be
made liable towards third parties for the acts of the firm done after expulsion unless a public
notice of the expulsion has been given.11

c) Insolvency of a partner (s 34) According to s 34 (1): „Where a partner in a firm is adjudicated

an insolvent he ceases to be a partner on the date on which the order of adjudication is made,
whether or not the firm is hereby dissolved”

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 a partner as insolvent, the firm is also dissolved

or not depends upon the contract between the partners. According to s 42 (d), unless the partners
agree otherwise, a firm is dissolved by the adjudication of a partner as insolvent.

His liability after adjudication

11
S 33 (2).

[Incoming and outgoing partners under partnership act, 1932] Page14

According to s 34 (2), where the firm is not dissolved on the adjudication of a partner as
insolvent and the other partners agree to continue the business, the estate of the insolvent partner
is not liable for an act of the firm after the date of adjudication. In his case, he is absolved from
liability for future acts even though no public notice of his being adjudicated insolvent is given.
His position is, therefore, different from the retired or the expelled partner, whose liability for the
acts of the firm continues unless a public notice of retirement or expulsion is given. The reason
why such a notice has been dispensed with is that insolvency is itself a notorious fact which is
not required to be notified to anybody.

d) Death of a partner (s 35) Although on the death of a partner, a firm is dissolved 12 but, if the
other partners so agree, the firm may not be dissolved16 and the business of the firm may be
continued with remaining partners.

As regards the liability of his estate for the acts of the firm done after his death, the position is
the same as in the case of an insolvent partner. If the firm is not dissolved on the death of a
partner, the estate of the deceased partner is not liable for acts of the firm done after his death.13

No public notice is required to be given on the death of a partner.

CHAPTER IV: - Rights and Liability of Incoming & Outgoing partners

12
Section 42(c). Bare Act Partnership Act 1932
13
Section 35, Bare Act Partnership Act 1932

[Incoming and outgoing partners under partnership act, 1932] Page15

Liability of estate of deceased partner: — Where under a contract between the partners the
firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable
for any act of the firm done after his death.

Under section 261 of the Indian Contract Act (now repealed) the date of a deceased partner is
not, in the absence of an express agreement, liable in respect of any obligation incurred by the
firm after his death. That part of estate of a deceased partner which comes to his son who is not a
partner will not ordinarily be liable in respect of any acknowledgement made by another partner
after the death of his father. 14 If payments are made in liquidation of a debt after the death of a
partner, the estate can take advantage of it.15

Right of outgoing partner to carry on competing business.—(1) An outgoing partner may

carry on a business competing with that of the firm and he may advertise such business, but,
subject to contract to the contrary, he may not,—
(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(a) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

Agreements in restraint of trade.—(2) A partner may make an agreement with his partners that on
ceasing to be a partner he will not carry on any business similar to that of the firm within a
specified period or within a specified local limits; and, notwithstanding anything contained in
section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the
restrictions imposed are reasonable.

Remedy for Breach of Agreement: -

Where an outgoing partner enters into an agreement in restraint of trade, but subsequently
commits a breach thereto, the aggrieved party in a proper case can claim the actual damages he
has suffered due to the past breaches of the agreement and also an injunction restraining the
14
Md. Said v. P.N.B., AIR 1937 Lah 869.
15
in the matter of Bank of Rajasthan Ltd., AIR 1962 Tripura 30.

[Incoming and outgoing partners under partnership act, 1932] Page16

defendant from future breaches.16 But if the agreement contains a stipulation as to the liquidated
damages for breach, the aggrieved party cannot claim both the liquidated damages and
Injunction.17

Right of outgoing partner in certain cases to share subsequent profits.—Where any member
of a firm has died or otherwise ceased to be a partner, and the surviving or continuing
partners carry on the business of the firm with the property of the firm without any final
settlement of accounts as between them and the outgoing partner or his estate, then, in the
absence of a contract to the contrary, the outgoing partner or his estate is entitled at the
option of himself or his representatives to such share of the profits made since he ceased to
be a partner as may be attributable to the use of his share of the property of the firm or to
interest at the rate of six per cent per annum on the amount of his share in the property of the
firm:

Provided that whereby contract between the partners an option is given to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner, and that option is
duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the
case may be, is not entitled to any further or other share of profits; but if any partner assuming to
act in exercise of the option does not in all material respects comply with the terms thereof, he is
liable to account under the foregoing provisions of this section.

Rights of Retiring Partner

In Pamuni Vishnu Vinodh Reddy v. Chillakurn Chandrasekham Reddy, 18 the plaintiff retired from
the partnership firm on a particular date after selling his share in the firm. It was held that once
he had retired from the partnership firm, he had no right to claim any further share in the profits
of the firm. When the defendants had not paid the value of the share of the plaintiff pursuant to
the agreement for retiring from the firm, it has become a debt on the defendants and the plaintiff
is entitled to recover the same with interest. The value of the share of die plaintiff on the date of

16
Stiles v. Ecclestone, (1903) 1 KB 544.
17
General Accident Assurance Corp. v. Noel, (1902) 1 KB 333.
18
2003 AIR SCW 1001: 2003 (2) SCALE 242.

[Incoming and outgoing partners under partnership act, 1932] Page17

his retirement from the firm would be regarded as a pure debt with effect from the date on which
he ceased to be a partner as per the agreement entered into between the partner. Otherwise the
result would be that he was deemed to have been continued as partner of the firm even after he
retired from the firm. If consideration is not paid as per the agreement, he would be entitled to
enforce it as per law. Mere non-payment of consideration does not take away the legal effect of
retirement from the partnership firm.

Rights and Liabilities of an Outgoing Partner

A partner retired from a partnership business due to old age and the remaining two partners were
given the right to continue the same business. It was mutually agreed that the share in the
goodwill of the retiring partner would be used to set off his liabilities to the firm. It was held that
the retiring partner was not liable to render account or to bear any loss incurred by the new
partnership firm.19

CHAPTER V: - Inference

Conclusion

19
K.P.A. Veilayappa Nadar v. Bhagiruthi Ammal, (1997) 1 SCC 211.

[Incoming and outgoing partners under partnership act, 1932] Page18

The contract of Partnership is a harmonious relationship, and every partner is inter-related to
each other within the periphery of the rights and liability towards the firm. 20 The sanctity of this
relationship is preserved through the joint and severable liability against 3 rd party supported by
the indemnity contract within the firm in case of fraud, self-centrism or unreasonable step which
leads to a kind of liability towards whole of the firm.

The relationship between the partners is a kind of bond administered by Partnership contract, and
the same bond can be deferred or can be dissolved or the nature of the bond can be altered
through incoming or outgoing of the partners in a firm, It is thus very important to regulate the
relationship as it becomes the gateway through which the relationship can be altered in case of
emergency like partner’s death etc.21

Thus to preserve the mobility in relation with time and with necessity Chapter V of The Indian
Partnership Act, 1932 is very important.

. References

BOOKS -
 Bare Act- The Contract Act 1872
 The Law of Contract. Author, Avtar Singh. Edition, 2. Publisher, Eastern Bk. Company,
1976.

20
The Law of Contract. Author, Avtar Singh. Edition, 2. Publisher, Eastern Bk. Company, 1976
21
Pollock & Mulla On Indian Contract and Specific Relief Acts; with a Commentary, Critical
and Explanatory. Bombay :N. M. Tripathi, 1972.

[Incoming and outgoing partners under partnership act, 1932] Page19

  The Indian Contract Act. Author, R. K. Bangia. Edition, 4. Publisher, Allahabad Law
Agency,1990
 Pollock & Mulla On Indian Contract and Specific Relief Acts; with a Commentary,
Critical and Explanatory. Bombay :N. M. Tripathi, 1972.

INTERNET –

 http://www.shareyouressays.com/essays/short-essay-on-the-incoming-and-outgoing-
partners-in-a-firm/92244
 http://law.uok.edu.in/Files/5ce6c765-c013-446c-b6ac-
b9de496f8751/Custom/INCOMING_AND_OUTGOING_PARTNERS.pdf
 http://www.infipark.com/articles/meaning-incoming-outgoing-partners/
 http://www.preservearticles.com/201101153418/rights-duties-and-liabilities-of-
partners.html

[Incoming and outgoing partners under partnership act, 1932] Page20