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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT

UNIVERSITY INSTITUTE OF LEGAL STUDIES PANJAB UNIVERSITY


BUSINESS LAW

SUBMITTED TO

SUBMITTED BY

Ms. Gurjinder Kaur Aditya Dassaur


7th Semester, 4thyear Roll No.206/10

Written Submission INCOMING AND OUTGOING PARTNERS

THESIS

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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT

TABLE OF CONTENTS
Introduction ..................................................................................................................................... 4 Essentials......................................................................................................................................... 4 Introduction of a partner-New Partner ............................................................................................ 4 Break in Identity of Firm by Addition of New Partners ............................................................. 4 Liability of a Incoming Partner ................................................................................................... 5 Retirement of a partner. Sec 32 (1) A partner may retire ........................................................... 6 Section 32(1): Retirement in a Partnership-at-Will..................................................................... 6 Notice of Resignation .................................................................................................................. 6 Liability of a Retiring Partner ..................................................................................................... 6 Section 32(2): Obligation of Retiring Partner ............................................................................. 8 Section 32(3) ............................................................................................................................... 9 (i) Notice of Retirement .............................................................................................................. 9 Effect of Retirement of Partner ................................................................................................... 9 Retirement of a Partner and Valuation of his Share .................................................................. 10 Expulsion of a partner.. ................................................................................................................. 10 Insolvency of a partner.................................................................................................................. 11 Dissolution of Partnership ......................................................................................................... 11 Liability of estate of deceased partner. ......................................................................................... 12 Right of outgoing partner to carry on competing business ........................................................... 12 Agreement in Restraint of Trade ............................................................................................... 13 Remedy for Breach of Agreement ............................................................................................ 13 Right of outgoing partner in certain cases to share subsequent profits......................................... 14 Rights of Retiring Partner ......................................................................................................... 15 Rights and Liabilities of an Outgoing Partner ........................................................................... 16 Revocation of continuing guarantee by change in firm. ............................................................... 16 Bibliography17

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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT

ACKNOWLEDGEMENT

I would like to express my Gratitude to my teacher, Ms. Gurjinder Kaur who gave me the golden opportunity to do this wonderful project on the topic Incoming and Outgoing Partners which also helped me in doing a lot of Research and I came to know about so many new things. Secondly I would also like to thank my parents and friends who helped me a lot in finishing this project within the limited time.

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INTRODUCTION
The law of partnership is contained in the Indian Partnership Act, 1932, which came into force on 1st October 1932. The act is mainly based on English Partnership act 1890 and practically codifies the Indian law of partnership.

Partnership is defined under Sec- 4 of this act:

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.

ESSENTIALS
Following are the essentials which are required for a valid partnership: Partnership is an association of two or more persons. It must be result of an agreement between two or more persons. The agreement must be to carry on some business. The agreement must be to share profits of the business. Business must be carried on by all or any one of them acting for all.

INTRODUCTION OF A PARTNER-NEW PARTNER


Object of section 31(1): The general idea behind section 31(1) of the Act is that the consent of all the existing partners is required to the introduction of a new partner so that the firm may work harmoniously. A new partnership may be by an oral agreement or in writing. 1

Break in Identity of Firm by Addition of New Partners


Whenever the constitution of a firm changes by addition of new members as partners, there is a break in the identity of the firm whether or not the name continues to be the same. After a change in the constitution of the firm by addition of new partners what formerly was the property of the old firm does not continue to be the property of the old firm. When the change in the constitution is merely a paper transaction and not a genuine and real transaction, the court would disregard the change in the constitution of the firm and would regard the

1MeenakshiAchi v. P.S.M.S Chettiar, AIR 1957 Mad 8.

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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT property of the old firm in spite of the apparent though real, change in the constitution. Where, however, there is a real change in the constitution and the new firm is a new identity there seems to be no justification for the view that whatever was the part of the property of the old firm continues to be its property in spite of such change. If the properties could not reach in thehands of the old firm, it could not be attached obviously in the hands of the new firm.2

Liability of an Incoming Partner


To determine the issue whether an incoming partner is liable to an existing creditor of the firm, two questions are to be answered. First, whether the new firm has assumed the liability to pay the debt; secondly, whether the creditor has agreed to accept the new firm as his debtor and to discharge the old partnership from its liability. A creditor must prove both the said conditions in order to hold the newfirm liable for his debts.3 In the case of a partnership consisting of only two partners contract to continue partnership by admitting legal representative of nominee of deceased partner on the death of one partner does not make a partnership to exist for taking in new partner. Surviving partner continuing business of partnership with the members of deceased partner's family does not constitute a firm within section 16(f)(6) of the Income-tax Act.4 An incoming partner can be held liable for existing debts of the firm if he has assured liability and the creditor has accepted him as a debtor. Where documents on record show that new partner had acknowledged pre-existing liability and was also trying to clear the dues and the act of the Bank was not withdrawing the credit facilities of newly constituted firm, all those would show that the new partner is liable to pay pre-existing debts of the firm. Though the new partnership deed did not provide for assumption of such liabilities by the new partner, yet, it was held that it was immaterial for determination of this question.5

2GouriSankar v. CM, Bank Ltd., AIR 1959 Cat 262. 3MeenakshiAchi v. P.S.M.S. Chettiar, AIR 1957 Mad 8; see also W.T. Commr. v. PadampatSinghania, 1981 Tax LR 683. 4Commissioner of Income-tax v. G.S. Mills, AIR 1961 SC 24. 5B.M. Devaiah v. Canara Bank, AIR 2003 Kant 143.

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RETIREMENT OF A PARTNER. SEC 32 (1) 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. A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement. Notwithstanding the retirement of a partner from a firm, he and the partners continue to be 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 the retirement, until public notice is given of the retirement. Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner. Notices under sub-section (3) may be given by the retired

Section 32(1): Retirement in a Partnership-at-Will


A partnership in a partnership-at-Will cannot retire except by giving a notice in writing under section 32(1)(c) of the Act.6

Notice of Resignation
Section 32(1) requires that there should be a notice in writing which involves the idea that the notice should reach the other partners. But if the partnership is not at Will, a notice of registration given by one partner will not serve any purpose.7

Liability of a Retiring Partner


Even if the notice of retirement is given, still the partnership cannot be absolved from the liability by giving his unilateral notice of the retirement. He is required to satisfy the court
6Banvari Lai v. Roop Kishore, AIR 1945 All 332. 7Badrivisha! v. Naming Rao, AIR 1959 AP 116.

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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT that after the notice of retirement the creditor has acquiesced in that position and has agreed to get his dues satisfied from the newly constituted partnership firm.8 Under section 32(2) of the Indian Partnership Act, 1932 the liability of a retiring partner as against the third party would be discharged only if there is an agreement made by the retiring partner with the third party and partners of the reconstituted firm, of course an agreement could be implied by the course of dealing between the third party and the reconstituted firm after the retirement of the partner.9 In that case it was held further that if a creditor takes a new security for the debt from the continuing firm, then it shows his intention to deal with the continuing partner for debts owed by the firm. In absence of such express or implied agreement, a public notice is necessary. A partnership firm took overdraft facility and medium term loan of the firm. The amount of liability to the Bank remained unpaid. The defendant in the meantime retired from the partnership firm. The Bank filed a suit for recovery of the loan. The retirement of the defendant was duly intimated to the Bank. There was subsequent agreement between the Bank and other remaining partners that they undertook as partners to remain liable to the Bank. The Bank did not take the signature of the defendant retiring partners for revival letters in respect of the loan and also in the subsequent agreement made by and between the Bank and the existing partners. It was held that the partners of the reconstituted firm at once would be liable for debts of the old firm and that the retiring partner was said to have been discharged from liability to the Bank.10

Meaning of the Expression "Dissociate from the Partnership Business"


A partnership business is run in accordance with the terms of the contract of partnership. The terms, inter alia, envisage a situation that a partner can retire from partnership. The expression "dissociate from the partnership business" envisages a situation where a partner wants to retire from business.11

8Jayantilal v. Mirandas& Sons, AIR 1983 Bom 226. 9Syndicate Bank v. R.S.R. Engineering Works, (2003) 6 SCC 265. 10K], George v. State Bank of Travancore, AIR 2002 Ker 214. 11Vishnu Chandra v. Chandrka Prasad, AIR 1983 SC 523.

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Section 32(2): Obligation of Retiring Partner


Even where parties agree amongst themselves that the continuing partners shall be liable for the obligation of a retiring partner, such an agreement cannot per se affect the rights of the creditors being res inter alias acta.12

Effect of Retirement of One Partner out of Two Partners


Where there are only two partners the appropriate term to describe the severance by one partner of his connection with the business of the partnership is dissolution and not retirement. The expression "retirement" is appropriate if there are more than two partners at that time and the partners other than the retiring partner can continue the business of the firm.13

No Provision for Separation of Share


The Act does not make any provision of the separation of the share of a retiring partner and the intention may be that this shall be determined by agreement between the partners. A partner who is not a minor, and has not obtained the agreement of the other partners to severance of his share, can only secure separate possession of his share by seeking dissolution and in such a case the rules laid down in sections 46, 48 and 49 become applicable.14

No assignment of Retiring Partner's Right in Continuing Partners


Retirement from the partnership by one partner may result in fact that the business vests in the continuing partners exclusively and it does result in fact that the retiring partner ceases to have any right, title and interest in the business as such; but that does not mean that the retiring partner has 'assigned' the business with the stock-in-trade and goodwill thereof in favour of the remaining partners.15

hMeenakshiAchi v. P.S.M.S. Chettiar, AIR 1957 Mad 8. 13Vedachala v. Rangaraju, AIR 1960 Mad 457. 14AjudhiaPershad v. Sham Sunder, AIR 1947 Lah 13 (FB). 15KusumBhimrao v. JavakarLalchand, AIR 1982 Bom 245.

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Valuation of Goodwill on Retirement of a Partner


For determination of share of retired partner, the super-profit method is proper for valuation of goodwill in particular facts of a case.16

Section 32(3)
(i) Notice of Retirement
The question whether a person dealing with a firm has notice of the dissolution of the firm by the retirement of one of partners from it is one of fact and the onus of proving that fact is plainly on such partner and this onus is discharged if there is evidence to the effect that notice was given.17

(ii) Object of Public Notice:


Public notice is intended only to serve a purpose, namely, to bring home to the persons concerned the fact of retirement. That purpose will undoubtedly be served in a better way by personal or actual notice.18

Effect of Retirement of Partner


1.

A provision in the partnership deed for retirement is not inconsistent with a partnership-at-Will though firm constituted by only two partners.19

2.

Liability of retiring partner in absence of public notice: Liability does not extend to his being liable to be adjudicated as insolvent for the act of the firm at a subsequent date.20

3.

Retiring partner: He is not discharged to pay income-tax on reconstitution of the firm.21

4.

A retiring partner can avoid liability by giving public notice or retirement. But absence of such notice cannot mean that a partner even after retirement continues to be liable to third parties.22

16MchruBelgamVala v. G. Bell & Co., AIR 1983 Mad 351. 17Kala Ram v. P.N.B. Ltd., AIR 1935 PC 14. 18Central United Bank v. Venkntarama, AIR 1963 Mad 302. 19TalakchandKtrnjiVora v. Keshavlal, AIR 1973 Cal 279. 20VcerappaChcttiar v. KalidossChcttiar, AIR 1974 Mad 150. 21S.B. Amcruddm v. I.T.O., 92 ITR 366. 22P.V. Gandhi v. Gitanjati, AIR 1973 Mad 115.

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5.

Where the new firm assumes liability to pay the debt due to the old firm and the creditor agrees to accept the new firm as his debtor to discharge the old partnership firm from its liability, the partners of the new firm would be liable to pay the creditor.23

Retirement of a Partner and Valuation of his Share


A partner retires from a firm by agreeing to sell his share in partnership firm. The firm is reconstituted thereafter. The Commissioner is appointed by the court for ascertaining the value of his share. The relevant date for such ascertainment is the date of which the partner retires and not the date on which the Commissioner makes the valuation. The unpaid share of the retiring partner was a debt payable with interest whenever paid.24

EXPULSION OF A PARTNER
(1) 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. (2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an expelled

partner as if he were a retired partner.

Scope
Section 33 applies where the power of expulsion has been reserved in the articles of the partnership and where the power has been exercised in good faith by all partners whose concurrence is necessary. It does not apply to forcible expulsion of a partner from the business in violation of the contract of partnership.25

Exercise in Good Faith


Where a notice to show cause has been duly given to the partner who is subsequently removed by a unanimous resolution of other partners. It cannot be said that power is not exercised in good faith.26
23VinaithcethalAchi v. Chidambaram, AIR 1972 Mad 238. 24Pamuru Vishnu Vmodh Reddy v. ChillakuruChandrasekhara Reddy, (2003) 3 SCC 445. 25Ramnarayan v. Kashinath, AIR 1954 Pat 53. 26Ganesh Chandra v. Gopal Chandra, AIR 1976 Cal 459.

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Power of Expulsion Conferred on One Partner


A power of expulsion of a partner may be conferred on one partner by a deed of partnership provided such an action is taken in good faith in exercise of such power.27 Where there are only two partners a power of expulsion is, in effect, a power to determine the partnership although the partnership agreement may provide for different consequences according to the occasion of its determination. In a multi partner partnership the power of expulsion is strictly construed.28

INSOLVENCY OF A PARTNER
(1) Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is hereby dissolved.

(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.

Insolvency of a Partner: Net Amount of his Share in Partnership Vests in Receiver


Under the Provincial Insolvency Act, 1920 what vests in the Receiver when a partner is declared insolvent subsequent to the dissolution of partnership, is his separate property and the net amount of his share in the partnership, after the account of partnership are made up and settled.29

Dissolution of Partnership
If a partner is adjudged an insolvent, he ceases to be a partner in the firm on the date the order of adjudication is made by virtue of section 34 of the Act and except where there is a contract to the contract, such firm also dissolved under section 42(d) of the Act.30

27Mushtaque& Co. v. C.I.T., 1973 Tax LR 26. 28Lindely and Banks on Partnership (18th Edn.,para 10-111) See Hitchman v. Crouch Butler Savage Associates Services Ltd., (1983) 127 SJ 441 (The Court need not apply the strict rule of construction). 29hixmmaraynn v. Dwarakaprasad, AIR 1964 MP 55. 30Narsmgh Das v. Bhmram Das AIR 1961 Raj 81.

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Date of Dissolution
There was no provision in the Indian Contract Act, nor is there any provision in the corresponding sections of the (English) Partnership Act, 1890, on the date from which the dissolution of the firm will take effect in the event of insolvency of a partner. But it has been held that the date of such dissolution is the date of the commencement of the bankruptcy of the partner.31If that English principle is followed, m India, the date of such dissolution shall be the date on which the order of adjudication is made. But if construction is put to subsection (1) of section 34 dissolution of the firm may be made on that day or any other subsequent day.

LIABILITY OF ESTATE OF DECEASED PARTNER.


Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death. Under section 261 of the Indian Contract Act (now repealed) the date of a deceased partner is not, in the absence of an express agreement, liable in respect of any obligation incurred by the firm after his death. That part of estate of a deceased partner which comes to his son who is not a partner will not ordinarily be liable in respect of any acknowledgement made by another partner after the death of his father.32 If payments are made in liquidation of a debt after the death of a partner, the estate can take advantage of it.33

RIGHT OF OUTGOING PARTNER TO CARRY ON COMPETING BUSINESS


(1) An outgoing partner may carry on a business competing with that of the firm and he may advertise such business, but, subject to contract to the contrary, he may not, (a) use the firm name,
31Harvey v. Cricket, (1816) 5 MQS 336: 17 RR 338. 32Md. Said v. P.N.B., AIR 1937 Lah 869. 33in the matter of Bank of Rajasthan Ltd., AIR 1962 Tripura 30.

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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT (b) represent himself as carrying on the business of the firm, or (c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner. Agreements in restraint of trade.(2) A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within a specified local limits; and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.

Agreement in Restraint of Trade


A, barrister-partner covenants with his co-partner, on ceasing to be partner that he will not practice for 5 years.A is restrained from setting up practice before the expiry of the term of five years.34

Reasonableness of Restriction
The otitis to prove that the restrictions imposed in an agreement in restricted of trade are reasonable is on the party which pleads that they are reasonable.35

Remedy for Breach of Agreement


Where an outgoing partner enters into an agreement in restraint of trade, but subsequently commits a breach thereto, the aggrieved party in a proper case can claim the actual damages he has suffered due to the past breaches of the agreement and also an injunction restraining the defendant from future breaches.36 But if the agreement contains a stipulation as to the liquidated damages for breach, the aggrieved party cannot claim both the liquidated damages and Injunction.37

34Noel Home v. John Douglas, (1912-13) 17 CWN 215 (PC). 35HukmiClrnnd v. Jaipur Ice & Oil Mills, AIR 1980 Raj 155. 36Stiles v. Ecclestone, (1903) 1 KB 544. 37General Accident Assurance Corp. v. Noel, (1902) 1 KB 333.

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RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFITS


Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them andthe outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm. Provided that whereby contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.

Scope and Applicability


Section 37 postulates that there was no settlement of accounts, before a claim for share in profits can be made. So, in a suit for share in profits section 37 would not take it out of limitation under Article 5 of the Limitation Act, 1963.38

Substantive Law
Section 37 lays down the substantive law relating to the liability of a surviving partner who without a settlement of accounts with legal representative of the deceased partner utilises the assets of the partnership for continuing the business as his own.39

Equitable Doctrine
The rule embodied in section 37 is only a breach of well-recognised equitable doctrine that if a trustee mixes the trust fund with his own moneys and employs both in a trade of his own, the cestuique trust
38P.S. Nagaranjanv. Robert Hotz, AIR 1954 Punj 278. 39Laxmidasv. Nanabhai, AIR 1964 SC 11.

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may either claim a proportionate share of the profits or interest on the amount of the trust funds so employed.40

Carrying on Similar Business by Surviving Partner


The right of a deceased or outgoing partner to the share of the profits mentioned in section 37 is dependent on the surviving or continuing partner "carrying on the business of the firm with the property of the firm". The claimant has, therefore, to establish that the business of the firm is being

carried by the partner notwithstanding the dissolution. The carrying oil of a similar business by the surviving partner after the termination of partnership does not bring the case within the equitable doctrine enunciated by section 377

Section 37 and Section 54


Section 37 does not come into conflict with section 54 which is entirely separate. Section 37 is intended to meet a case where it is alleged that a continuing partner after ceasing of the partnership business and before the settlement of final accounts utilizes the assets of the partnership to his exclusive advantage. But under section 54 there has to be a specific provision in a partnership agreement restraining a partner from carrying on a business

Suit under Section 37


K, a Mohammedan, carried on partnership business with three other partners. On the death of K, the business of the firm was carried on with the eldest son of K as his representative. The plaintiffs, being the heirs of K's daughter, filed a suit for dissolution of partnership and for accounts. It was held that the suit was not maintainable under section 37 as they did not claim as representatives of the deceased partner. Besides, the suit having been filed after lapse of three years from the date of the death of the partner was barred by the law of limitation.

Rights of Retiring Partner


In Pamuni Vishnu Vinodh Reddy v. ChillakurnChandrasekham Reddy,41 the plaintiff retired from the partnership firm on a particular date after selling his share in the firm. It was held that once he had retired from the partnership firm, he had no right to claim any further share

40Kasiv. RamanathamChettiar, AIR 1949 Mad 693; see Ramnarayan v. Kashinath, AIR 1951 Pat 53. 412003 AIR SCW 1001: 2003 (2) SCALE 242.

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INCOMING AND OUTGOING PARTNERS ~ PROJECT REPORT in the profits of the firm. When the defendants had not paid the value of the share of the plaintiff pursuant to the agreement for retiring from the firm, it has become a debt on the defendants and the plaintiff is entitled to recover the same with interest. The value of the share of die plaintiff on the date of his retirement from the firm would be regarded as a pure debt with effect from the date on which he ceased to be a partner as per the agreement entered into between the partner. Otherwise the result would be that he was deemed to have been continued as partner of the firm even after he retired from the firm. If consideration is not paid as per the agreement, he would be entitled to enforce it as per law. Mere non-payment of consideration does not take away the legal effect of retirement from the partnership firm.

Rights and Liabilities of an Outgoing Partner


A partner retired from a partnership business due to old age and the remaining two partners were given the right to continue the same business. It was mutually agreed that the share in the goodwill of the retiring partner would be used to set off his liabilities to the firm. It was held that the retiring partner was not liable to render account or to bear any loss incurred by the new partnership firm.42

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM


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. Where a continuing guarantee is given on the confidence of a person of a firm, it is revoked on change of such person in the firm, because the risk of surety is altered. Change in the constitution of a firm may occur by the death, or the retirement of a partner or by the introduction of a new partner. Any change due to any such event puts an end to the surety's liability so far as subsequent events are concerned. In all such cases the surety's position and risk are altered and he has a right to say that this is not what I agreed).

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42K.P.A. VeilayappaNadar v. BhagiruthiAmmal, (1997) 1 SCC 211.

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BIBLIOGRAPHY
STATUTES/RULES 1. The Indian Partnership Act, 1932

BOOKS 1. Bangia R.K, The Indian Partnership Act 1932, 2011, Allahabad Law Agency WEB SITES 1. 2. 3. 4. 5. 6. www.indiankanoon.org/search/?...incoming%20and%20outgoing www.karunadu.gov.in/karigr/actsrules/indianpartnershipyact/5.html www.scribd.com/doc/79668816/Incoming-and-Outgoing-Partners www.studymode.com Marketing & Advertising www.fh-krems.ac.at/en/.../incoming-outgoing www.mponline.gov.in/Quick%20Links/.../IPA1932English.pdf

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