Legal Consequences of Admission or Retirement of a Partner

Whenever there is an admission of a new partner or retirement of a partner, or expulsion or insolvency of a partner, etc., the partnership firm undergoes reconstitution. Sections 31 to 35 of the Indian Partnership Act, 1932 help us understand the legal consequences of a partner coming in or going out. Let us take a look.

Learn Kinds of Partnerships here.

Admission or Introduction of a Partner (Section 31)

According to this section, the consent of all the existing partners is necessary before introducing a new partner into a partnership firm. This is subject to the provisions of Section 30 regarding minors in the firm. Further, the new partner has no liability for any actions of the firm done before his admission.

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Rights and Liabilities of a New Partner

All liabilities of a new partner commence from the date of his admission as a partner in the firm. This is unless he accepts liability for the obligations incurred by the firm before his admission.

So, after the admission of a new partner, the new firm may agree to assume liability for the debts of the old firm and the creditors may accept the new firm as their debtor, discharging the old firm. It is important to note that the creditor’s consent is important to make the transaction operative.

In a contract, the technical term for substituted liability is Novation. Hence, a mere agreement amongst the partners cannot operate as Novation unless the creditors provide their consent.

Learn Rights of Outgoing Partner here in detail.

Legal Consequences of Admission or Retirement of a Partner

The retirement of a Partner (Section 32)

A partner retires when he ceases to be a member of the firm without ending the subsisting relations between the other members of the firm or between the firm and other parties. If a partner withdraws from a firm by dissolving it, then it is a dissolution and not retirement of a partner. The retirement of a partner from a firm does not dissolve it.

In a partnership, a partner may retire:

With the consent of all the partners,
In accordance with an express agreement by the partners, or
The partnership is at will, by giving notice in writing to all the other partners of his intention to retire

Learn all about Retirement of a partner here.

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.

Expulsion of a Partner (Section 33)

A partnership firm can expel a partner provided:

The power of expulsion exists in the contract between the partners
Majority of the partners exercise the power
The power is used in good faith

If these conditions are not met, then the expulsion is not bona fide in the interest of the business. The test of good faith includes three aspects:

The expulsion should be in the interest of the partnership.
Before expelling a partner the firm serves a notice to him.
The partner being expelled is given an opportunity to state his version of events leading up to the expulsion.

If these aspects are not met, then the expulsion is not considered to be made in good faith and is null and void. It is important to note that the expulsion of partners does not necessarily result in the dissolution of the firm.

Insolvency of a Partner (Section 34)

When a partner of a firm is adjudicated as insolvent –

He ceases to be a partner of the firm from the date of the adjudication
Whether or not the firm subsequently dissolves
His estate, which vests in the official assignee, ceases to be liable for any act of the firm from the said date
The firm ceases to be liable for any act of such a partner.

Liability of Estate of a Deceased Partner (Section 35)

Usually, the death of a partner results in the dissolution of the partnership. However, if the partner’s contract to not dissolve the partnership post the death of any partner, then the surviving partner continue the business of the firm after absolving the deceased partner’s estate from any liability of the future obligations of the firm.

Further, it is not necessary for the firm to give a public notice or inform the persons dealing with the firm about the death of the partner.

An exception is a partnership consisting of only two partners. In such cases, the death of a partner results in the dissolution of the partnership.

Solved Examples for You

Q: Peter, John, and Oliver are partners in a firm. John and Peter’s wives have a fight in the ladies’ club. Peter loses his temper due to the incident and convinces Oliver to expel John from the partnership firm. Oliver agrees and they expel John without giving him any notice or reason thereof. Is this a valid expulsion?

Answer: One of the main clauses of expelling a partner is that it should be done in good faith. The test of good faith includes three aspects:

The expulsion is in the interest of the partnership.
Before expelling a partner the firm serves a notice to him.
The partner is given an opportunity to state his version of events leading up to the expulsion.

In this case, Peter and Oliver did not follow any of the three aspects mentioned above. Hence, the expulsion is not done in good faith. Hence, it is null and void.

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