The Indian Partnership Act

Rights of Outgoing Partner

A partner who leaves the partnership firm in which the remaining partners continue the business is an outgoing partner. Such a partner has certain liabilities and rights as prescribed by the Partnership Law. In this article, we will focus on the rights of an outgoing partner.

Right of an Outgoing Partner to Carry on a Competing Business

Section 36 (1) of the Indian Partnership Act, 1932 (Partnership law), imposes certain restrictions but allows an outgoing partner to carry on a business and advertise it, which competes with the partnership firm. However, it restricts him from:

  • Using the name of the partnership firm
  • Representing himself as a partner of the firm
  • Soliciting the custom of persons who were dealing with the fi­rm before he ceased to be a partner.

Section 36 (2) talks about an agreement in restraint of trade. According to this subsection, an outgoing partner may make an agreement with his partners that when he ceases to be a partner of the firm, he will not carry on any business similar to that of the firm within a specified period or local limits. This is notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872.

Partnership law

Right of an Outgoing Partner to Share Subsequent Profits

According to Section 37, of the Partnership Law, if a member of the firm dies or otherwise ceases to be a partner of the firm, and the remaining partners carry on the business without any final settlement of accounts between them and the outgoing partner, then the outgoing partner or his estate is entitled to share of the profits made by the firm since he ceased to be a partner.

The share may be attributable to the use of his share of the property of the firm or the interest at six percent per annum on the amount of his share in the property.

The surviving partners also have an option of purchasing the interest of the deceased or outgoing partner. If the surviving partners choose to purchase the interest, then the outgoing partner is not entitled to any further share in profits of the firm.

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Solved Examples on Rights of Outgoing Partner

Q: Peter, John, and Oliver are partners in a shirt manufacturing company. Peter is entitled to three-eighths of the partnership property and profits. After a couple of years of business, Peter becomes bankrupt while John and Oliver continue the business without paying out Peter’s share of the firm’s assets or settling accounts with his estate. Does Peter get a share of the profits?

Answer: Yes. Peter is entitled to three-eighths of the profits made in the business from the date of his bankruptcy until the final liquidation of the partnership affairs.

Q: Peter, John, and Oliver are partners in a travel company. Oliver retires after selling his share in the partnership firm. However, Peter and John fail to pay the agreed value of the share to Oliver. Can Oliver recover the amount?

Answer: Yes. The value of Oliver’s share on the date of his retirement from the firm will be pure debt on the firm. This debt will be applicable from the date on which he ceased to be a partner of the firm as per the agreement between him and his partners. He can recover his share amount along with the interest.

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