Admission, retirement and expulsion of partners
Contract II · Unit IV · Topic 13 of 18 · 7 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Introduction of a partner: section 31
Subject to contract between the partners and to section 30, no person can be introduced as a partner into a firm without the consent of all the existing partners. Partnership rests on mutual trust and mutual agency, so a majority cannot force a stranger on a dissenting partner.
Section 31(2): subject to section 30, a person introduced as a partner does not thereby become liable for any act of the firm done before he became a partner. He may take on past debts by agreement with the creditors and the other partners (a novation), but the law does not impose them on him.
2. Retirement: section 32
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.
Past liabilities. A retiring partner remains liable to third parties for acts of the firm done before his retirement. Section 32(2) says he may be discharged from such liability only by an agreement made by him with the third party concerned and the partners of the reconstituted firm. The agreement may be implied by a course of dealing between the third party and the reconstituted firm after he had knowledge of the retirement.
Future liabilities and public notice. Section 32(3): notwithstanding the retirement, the retired partner and the continuing partners remain liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before retirement, until public notice is given of the retirement. Section 32(4): a retired partner is not liable to a third party who deals with the firm without knowing that he was a partner. That covers the sleeping partner who was never known to outsiders.
Public notice is defined in section 72: notice in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business, and, where the firm is registered, notice to the Registrar of Firms under section 63. Notice may be given by the retired partner or by any partner of the reconstituted firm (section 32(3)).
3. Expulsion: section 33
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. Three conditions follow:
- the deed must contain a power of expulsion;
- the decision must be by the majority the deed requires; and
- the power must be exercised in good faith, for the benefit of the firm and not to get rid of an inconvenient partner or take his share cheaply.
Good faith has been read, following English cases, to require that the partner be told of the charge and given an opportunity to explain before the power is used (Blisset v. Daniel, 1853). An expulsion that fails these tests is void and the partner continues to be a partner. A validly expelled partner is treated like a retired partner for the purposes of liability and public notice (section 33(2)).
4. Insolvency: section 34
Where a partner is adjudicated an insolvent, he ceases to be a partner on the date of the order of adjudication, whether or not the firm is thereby dissolved. His estate is not liable for any act of the firm, and the firm is not liable for any act of the insolvent, done after that date. Under section 42(d) the insolvency of a partner also dissolves the firm unless the partners have agreed otherwise.
5. Death: section 35
Where under a contract the firm is not dissolved by the death of a partner, the estate of the deceased is not liable for any act of the firm done after his death. No public notice is needed, because death is regarded as notice to the world. The legal representative is entitled to the deceased's share and to an account but does not become a partner unless all agree.
6. Rights of an outgoing partner: sections 36 and 37
Competing business (section 36(1)). An outgoing partner may carry on a business competing with that of the firm and may advertise it, but, subject to a contract to the contrary, he may not:
- use the firm name;
- represent himself as carrying on the business of the firm; or
- solicit the custom of persons who were dealing with the firm before he ceased to be a partner.
Restraint agreements (section 36(2)). A partner may agree with his partners that on ceasing to be a partner he will not carry on a similar business within a specified period or within specified local limits. Such an agreement is valid, despite section 27 of the Contract Act, if the restrictions are reasonable.
Share of subsequent profits (section 37). Where a partner has died or ceased to be a partner and the surviving or continuing partners carry on the business with the property of the firm without a final settlement of accounts, the outgoing partner or his estate is entitled, at his option, to such share of the profits made since he ceased as is attributable to the use of his share of the property, or to interest at six per cent per annum on the amount of his share. Where the continuing partners have an option under the contract to buy his share and exercise it in time, he is entitled only to the purchase price.
7. Revocation of continuing guarantee: section 38
A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm. A surety who guaranteed the dealings of A and B did not agree to answer for a firm of A, B and C. Past transactions remain covered. This applies the rule in section 133 of the Contract Act (variance in terms discharges the surety).
8. Problem
A, B and C are partners. C retires on 1 June with the consent of A and B, but no public notice is given. On 1 August A buys goods worth Rs 3 lakh from X, an old customer of the firm who knew C as a partner, and the firm fails to pay. Can X sue C?
Issue. Whether a retired partner is liable for acts of the firm after his retirement where no public notice was given.
Law. Section 32(3): the retired partner remains liable to third parties for acts which would have been acts of the firm until public notice is given. Section 32(4) protects him only against persons who did not know him to be a partner. Section 72 defines public notice.
Application. No public notice was given. X had dealt with the firm and knew C as a partner. The purchase was in the ordinary course of the business.
Conclusion. X can sue C along with A and B, and C is jointly and severally liable (section 25). C can claim indemnity from A and B under the retirement arrangement. Had C been a sleeping partner unknown to X, section 32(4) would have protected him.
How this is examined
Essays: “Explain the rights and liabilities of a retiring partner” or “When can a partner be expelled?” Short notes: section 31(2), public notice, section 37, revocation of continuing guarantee. The retirement-without-notice problem is the standard one and is answered as above.
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