Incoming Partners and Outgoing Partners under Indian Partnership Act

Who are Incoming Partners?

Meaning of Incoming Partners: – Incoming Partners are the partners who are joining the partnership firm by contract or is added to the firm. The ‘incoming partners’ are the partner who are joining the partnership firm by contract or added to the firm. Incoming Partners are the new partners who get admitted to the firm. Such admission is subject to any procedure that the firm at its will and understanding adopts to include new members.

New partners can be introduced into a firm in the following ways: –

With the consent of all existing 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.

According to a 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, that 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.

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 section 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 abovestated 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.

Liability of an Incoming Partner

Each partner is responsible for all the acts of the firm performed while being a partner. It is clear that as a general rule, the responsibility of incoming partners starts from the date of his/her joining.

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.

This partner makes such an agreement with its co-affiliates, the creditors may make them liable if they can show that the incoming partner had agreed with them expressly or, implicitly, towards them for the acts done before his joining.

Who is outgoing partner?

Meaning of Outgoing Partner: – ‘Outgoing partner’ is the partner who is leaving the partnership firm. When the partner leaves the firm either due to the retirement or due to the death, it is called as the outgoing partner. Outgoing partner is a partner who is going to leave a particular firm purposely or to he/she might be died or expelled by a firm. There are various criteria to leave the partnership firm which are given in the Indian Partnership Act,1932.

Therefore whenever any partner leaves that firm, he has rights in relation to the profits earned by him during the period of being a partner of that firm. Section 32 to 38 of the Indian Partnership Act deals with the different ways in which a partner may become an outgoing partner with their rights and liabilities.

What is the procedure of removal of the partner?

A partner can stop being a partner in the following ways: –

By Retirement (Section 32): – Voluntary withdrawal of a partner from the firm. It states that a partner may retire under certain circumstances: –
- With the consent of all other partners.
- With the partners express agreement.
- If it is a partnership at will, then a partner may retire by giving notice of retirement to all other partners.
- A retiring partner may be free from any liability to any third party for the acts of the firm by an agreement made by the outgoing partner with a third-party done before his retirement and such agreement being implied during the dealing.
- The retiring partner and the other partners will continue to be liable for any act done by them which would have been an act of the firm. It simply means that the retired partner is not liable to any third party who deals with the firm without knowing that he was a partner of the firm.
By Expulsion (Section 33): – Generally, expulsion of a partner is not possible except in the following situations: –
- It is necessary to remove the partner for the interest of the partnership.
- Notice has been given for the removed partner.
- Opportunity to listen to the expelled partner.
- And if these conditions are not met, such removal will be considered null and void.
By the insolvency of the partner (Section 34): – Insolvent is not allowed to continue as a partner. Hence the person who is declared insolvent ceases to be a partner on the date on which the adjudication order is made. On the partner’s insolvency, whether to dissolve the firm or not it depends on a contract between the partners.
Death of a partner (Section 35): – Generally, a partnership terminates on the death of a partner, but if there is a contract between the partners to continue the partnership even after the death of the partner and the firm’s business can be continued with the remaining partners.

Liabilities of an Outgoing Partner

A retired partner continues to be liable to the third party for acts of the firm till such time that he or other members of the firm give a public notice of his retirement. However, if the third party deals with the firm without knowing that he was a partner in the firm, then he will not be liable to the third party.

The retired partner, however, continues to be liable for acts of the firm done before such retirement of a partner. This liability holds good unless there is an agreement between him, the concerned third party, and partners of the reconstituted firm. Such an agreement can also be implied by the course of dealings between the third party and the reconstituted firm post announcement of the retirement of a partner.

If the partnership is at will, then it can relieve a partner without giving a public notice. To do so, the partnership needs to give a written notice to all the partners of his intention to retire.

Rights of an outgoing partner

Following are the rights of an outgoing partner: –

Rights of outgoing partners to carry on competing for business: – Section 36 (1) of the Indian Partnership Act deals with the rights of the outgoing partner. Section 36 (2) of the Indian Partnership Act deals with the agreement in restraint of business. According to this section, an outgoing partner may enter into an agreement with his partners that, when he ceases to be a partner of the firm, he will not conduct related to the business within the specific limits or the limited period. This imposes some restrictions, but allows an outgoing partner to compete with this business but with some restrictions which are imposed for the same: –
- Cannot use firm name.
- Cannot represent yourself as member of partner.
- Cannot solicit with the customs of the person, who was dealing with the firm before he ceased to be a partner.
Right of the outgoing partner in some cases to share future profits: – Section 37 deals with the rights of an outgoing partner in some cases to share future profits. It states that if a member of the firm dies or ceases to be a partner of the firm and another partner takes over the business if there is no final settlement between the partners; then the outgoing partner will entitle to the profit of his share, until he ceased to be a partner. The outgoing partner or his representative is entitled to use his share in the firm’s assets or interest at the rate of six percent per annum on the amount of the outgoing partner’s share in the firm. The other option for the remaining partner is to buy the stake of the deceased or outgoing partner. If the remaining partner chooses to buy a share of the outgoing partner than the outgoing partner, then the outgoing partner is no more entitled to receive a share of its profit.

Case laws under Incoming Partners and Outgoing Partners

1. Addanki Narayanappa and Ors. vs. Bhaskara Krishtappa and Ors

The Hon’ble Supreme Court upheld the sharing of benefits under Section 37 to the representatives of the deceased partner. However, if sharing this profit is subject to any contract to the contrary. Therefore, in cases where the firm purchases the remaining assets of the outgoing partner in the firm, then in such cases the outgoing partner are not entitled to any further profit sharing.

2. ‘Mohd. Laiquiddin and Ors. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors

The court determined that the death of a partner automatically dissolved the firm of two members. In addition, after the death of a partner, his assets are liable to the extent of the acts performed in the firm during the life of the partner. Acts done by the firm after the death of the partner have no obligation to be borne by the estate of the deceased.

What is the position of a Minor Partner?

Section 30 of the Indian Partnership Act 1932 contains legal provisions regarding a minor in a partnership. We now know that the Indian Contract Act 1857 clearly states that no person is under 18 years of age, that is, minors may be parties to a contract. Therefore, in any partnership firm a minor cannot be a partner.

However, according to the Partnership Act, a minor can be admitted for partnership benefits. Although a minor cannot become a partner but he/she can enjoy the benefits of the firm. All the partners of the firm must be in agreement for giving the benefits to the minor in the partnership.

Rights of a minor partner

Once a minor is given an advantage in a partnership, there are certain rights that he or she enjoys. Let’s have a look at the rights of a Minor Partner: –

A minor partner would clearly have a right to his share of the profits of the firm. But the minor partner is not liable for any loss beyond his interests in the firm. Therefore the liquidation of the personal assets of a minor partner cannot be used to pay the liabilities of the companies.
He can also inspect the books of the firm like other partners of the firm. He can ask for the copy of the books as well.
If necessary, he can sue any or all other partners for his share of profits or profits.
Upon attaining majority, a minor partner has the right to become a partner of the firm. He has six months from obtaining a majority to decide to execute this right. Whether he decides to become a partner or not, he should give public notice about the same.

What are the liabilities of a Minor Partner?

Liabilities of a Minor Partner are as follows: –

A minor cannot be held personally liable for the loss of the firm. And if the firm declares bankruptcy, the minor’s share is kept with the official receiver.
After attaining the age of majority or 18, the minor has to choose that whether he wants to become a partner or not. But he can choose not to be a partner. In this case, the minor partner must provide a public notice regarding this decision. And notice has to be given within 6 months of securing majority. If no such notice is given even after 6 months, the minor partner will become liable for all acts done by the other partners by the date of such notice.
If the minor partner become a partner, he will be liable to all third parties for the acts performed by any and all partners as he/she was admitted for the benefits of the partnership.
If he becomes a full-time partner, he will be considered a normal partner and will have all his liabilities. His share in the firm’s profits and assets would remain the same as when he was a minor partner.

Case laws under position of a Minor Partner

1. S.C. Mandal vs. Krishnadhan: – Section 30 of the Indian Partnership Act 1932 contains legal provisions regarding a minor in a partnership. We now know that the Indian Contract Act 1857 clearly states that no person is under 18 years of age, that is, minors may be parties to a contract. And a partnership is a contract between partners. Therefore, a minor cannot be a partner in any partnership firm. However, according to the Partnership Act, a minor can be admitted for partnership benefits. So, if a minor cannot become a partner but he can enjoy all the benefits of the partner. All the partners of the firm must be in agreement for giving the benefits to the minor in the partnership.

2. CIT vs. Dwarkadas & Co: – The Supreme Court held that a minor cannot become a full partner in an existing firm. Section 30 only allows the minor to get benefits from the firm. The Honorable Judge then continued to observe: – “Section 30 of the Indian Partnership Act clearly states that a minor cannot become a partner, however, with the consent of the adult partners, he/she can be admitted for partnership benefits. Any document that goes beyond this section cannot be considered valid for the purpose of registration.”