Concept Of Incoming And Outgoing Partners

    The partnership as a contract has been defined under Section 4 of the Indian Partnership Act 1932. As inferred from the section partnership can be defined as voluntary contract between 2 or more competent persons To put in their money, capital, labour, skill, or some or all of them in a lawful business with understanding that there shall be sharing of profit between them. Incoming and outgoing partners are the two basic kinds of defining the types of partners in a partnership firm. However this is not a restricted demarcation as to the only types which exist there might exist some other general categories for differentiating partners but these two are the important ones as they find a specific place in the statute so far. 

    INCOMING PARTNERS

    They can be defined as the partners who recently get admitted to the firm. However such admission of new members is subject to any procedure which has been already established by the firm and its already existing members to adopt any new member. 

    Furthermore rules regarding inclusion of new members into the firm find their place under Section 31(3) of the Act.[1]

    Firstly, new mew members can only be admitted to the firm with the consent of all the existing members. 

    Secondly, once a person is admitted as a partner to the firm then he shall be jointly liable to the acts of the form only taken place from the date at which he has joined the firm. Therefore it can be said that legal liabilities of the partners who have recently joined begins only after he is admitted to the firm and not before that. 

    OUTGOING PARTNERS 

    According to the statute there arise 4 kinds of situations where a partner may buy on his own or due to other reasons be ousted from the firm. The rules are specifically defined in Section 32,33,34,35 in the act.

    RETIREMENT OF PARTNER [2]

    There are 3 ways under which an already existing partner of the firm may be retired :-

    Firstly, with the consent of all other existing partners.

    Secondly, in a situation when there is an already existing contract between the partners. 

    Thirdly, in a situation when the partnership is at will. 

    On retiring, the partner has to serve a proper written notice disclosing his intention to get retirement from the firm. It is important to note that the retiring partner in no case or situation gets off the liabilities for the acts he did for the firm when he was an existing partner of the firm and he continues to be liable for the acts if the firm until he comes up with a public notice.  However there is no compulsion that the notice has to be served by the retiring partner only the other partners of the firm can also give the public notice regarding the retirement of that particular partner. Furthermore once he retires from the firm he gets discharged from all the liabilities toward the third party through an agreement between him, other partners and the third party stating the same. In case of absence of any such agreement there exists an implied notion for the same if the third party is already aware of the retirement but even then went ahead to deal with the reconstituted firm. 

    EXPULSION OF A PARTNER [3]

    A partner can  be expelled from the firm only in the presence of a pre decided procedure through an express contract. For such a situation the majority of partners must agree to the expulsion of the partner.

    This must be done only in exercise of good faith.  The test for good faith is as follows :-

    1. The expulsion so done shall be in in the interest of the firm
    2. Due notice must be served to the partner before expulsion 
    3.  The concerned partner must be given an opportunity to justify the actions which led to his expulsion from the firm 

    If all these above conditions are not fulfilled there shall lie no expulsion of any of the partners from the firm. 

    After being removed from the firm the partner so expelled must be treated as a retired partner and must have concerned liabilities as defined under Section 32 of the act .

    INSOLVENCY [4]

    If any of the partner of the firm becomes insolvent that it becomes unable to pay debts owed becomes an outgoing partner and hence cease to be a part of the partnership from the date at which he has been adjudicated insolvent under an order.  In a situation when insolvency of a partner does not ipso facto leads to dissolution of the firm the liabilities of the insolvent partner towards the firm changes and the firm exists as it was earlier but excludes the insolvent partner. The dte on which the order of insolvency has been adjudicated the partners estate is no longer liable for the acts if the firm after the date of the order. Furthermore the firm is also not liable for any of the acts done by the insolvent partner. 

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    LIABILITY OF ESTATE OF DECEASED PARTNER [5]

    Usually death of a partner leads to dissolution of the firm but there exists one exception to this rule and that is existence of a expressed contract stating otherwise. After the death of the partner his estate is liable to the firm only to the extent of acts done  in the firm during his life . Acts done by the firm after his death have no right to arise the liability of the estate of the deceased.

    RIGHTS OF OUTGOING PARTNERS

    TO CARRY ON COMPETING BUSINESS [6]

    On leaving the partner is free to start or even advertise any other firm or business that is in competition to the firm he already left. However, if there is not any express contract to contaray , there are restrictions on outgoing partners to either use the firm’s name he left or even misrepresent him as an existing partner of the firm. He cannot solicit customers or clients of the previous firm while he was still a partner there.

    Another underlying rule under this right of him is the existence of an express contract restricting the outgoing partner from executing any business which is similar to the firm within specified reasonable local limit and time. However such a contract between outgoing partner and existing partner is tested on the basis of its reasonability. It can also be concluded that this clause of the right is an exception to Section 27 of the Indian Contract Act  which renders any contract in restraint of trade as void. 

    CEASES TO SHARE SUBSEQUENT PROFIT [7]

    When a person dies and becomes an outgoing partner or leaves the firm due to any other reason and the firm he left still continues to exist and function. Such persons who left the firm  or his estate through their legal representatives are entitled to shares and profits availed by the firm after the partner has left the firm. 

    Share of profit shall be in any of the following two ways :-

    1. Either attributable to the use of his share of property in the firm

    OR

    1. Interest of 6% /PA on his share of profit of the firm.

    However this is only the case in situations when there is no final settlement of accounts between the partners of the firm. 

    Moreover, in cases where the firm purchases the remaining interests of the outgoing partner then this partner is no longer entitled to any share of the profits from the firm. 

    In the case of Addanki Narayanappa and Ors. v. Bhaskara Krishnappa and Ors. [8] The honourable supreme court asserted the allocation of profits under section 37 to the heirs or estate of a deceased partner. However any contract to the contrary is subject to this benefit sharing. Accordingly, in situations where the company acquires the remaining interests of the outgoing partner in the company, that partner shall not be further eligible for any profit-sharing rights.

    CONCLUSION 

    In a contract of partnership the firm carries on its business when 2 or more people come together to perform certain obligations towards each other and have certain responsibilities and liabilities towards each other and towards the firm. There may arise during certain situations when the existing partners might want to leave the firm or when some new member wants to join the firm. The statute specifies ways of entering new members, situations when an old partner leaves the firm and their rights and liabilities after being an ex member of the firm .

    REFERENCES 

    [1] The Indian Partnership Act, 1932, sec 31(3).

    [2] The Indian Partnership Act, 1932, sec 32.

    [3] The Indian Partnership Act, 1932, sec 33.

    [4] The Indian Partnership Act, 1932, sec 34.

    [5] The Indian Partnership Act, 1932, sec 35.

    [6] The Indian Partnership Act, 1932, sec 36.

    [7] The Indian Partnership Act, 1932, sec 37. 

    [8] 1966 AIR 1300; 1966 SCR (3) 400.

    BY- Janavi Chhabra | Guru Gobind Singh Indraprastha University

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