TOPIC: INCOMING AND OUTGOING PARTNERS IN A

PARTNERSHIP FIRM

Under the supervision of

FACULTY: DR. KS RASHMI

NAME: KAUSHIK J SUTHAR

COURSE: BBA LLB - SEM II
PROVISIONAL No:180401420024
SUBJECT: SPECIFIC PRINCIPLES OF CONTRACTS

APRIL 2018

1
ABSTRACT

A Partnership Firm is a kind of business form which is run by two or more people. The people
involved in this kind of business are called the Partners. A partner in a firm has certain authority
and powers against the firm as well as the other partners who are involved in the business. The
partners agree on certain rules and regulations before forming the business firm on which each
one of them has to abide on and if not done properly the issue can be taken to the Court as well.
The partners of the business firm form an Agreement, in which they mention about all the terms
and conditions, rules and regulations, etc, of the firm. The agreement then continues to be a
contract so the partners have the surety to get justice in case of kind of conflicts within the firm.
The partnership firm not only has the partners who work for the firm but it also has certain
people who work for it even without being a partner. These are the people who become the
helping hand for the firm. They can be anyone like: the supplier of raw materials, the
transportation person, the financer, etc.

2
 Table of Contents
CONTENTS PAGE NO.
1.Introduction……………………………………………………………………………4
1.1.History of Indian Partnership Act…………………………………………………5
1.2.Reasearch question………………………………………………………………..6
1.3.Scope and Objectives……………………………………………………………..6
1.4Methodology…………………………………………………………………...….6

2.What is the nature of partnership……………………………………………….…..….6

2.1.Criteria Of Partnership : ……………………………………………….…………..….6
2.2.Introduction of a partner…………………………………………………….………7
2.3.Organization Agreement – Oral , Written Or By Conduct………………………… 8
2.4.Retirement of an accomplice…………………………………………………….….9
2.5.Right of outgoing partner in certain cases to share subsequent profits………………11

3.Conclusion……………………………………………………………………….…….13

4.Bibliography……………………………………………………………………..…….14

3
1.Introduction
1.1History of Indian Partnership Act,1932
The Indian Partnership Act was instituted in 1932 and it came into power on first day of October,
1932[1]. The present Act supplanted the before law identifying with Partnership, which was
contained in Chapter XI of the Indian Contract Act,1872. The Act isn't thorough. It indicates to
characterize and alter the law identifying with Partnership.[2]

A Partnership emerges from an agreement, and hence , such an agreement is administered not just
by the arrangements of the Partnership Act in such manner , yet additionally by the general law of
agreement in such issues, where the Partnership Act does not explicitly make any arrangement. It
has been explicitly given in the Partnership Act that un cancelled arrangements of the Indian
Contract Act , 1872 , spare in so far as they are conflicting with the express arrangements of this
demonstration , will keep on apply.[3] Thus, the standards identifying with offer and
acknowledgment , thought , free assent , lawfulness of item ,and so forth, as contained in the Indian
Contract Act are material to an agreement of Partnership too. Then again , in regards to the situation
of minor , since there is explicit arrangement contained in Section 30 of the Indian Partnership Act ,
the minor's position is administered by the arrangement of the Partnership Act.

4
1.2.Research Question
“The law of partnership is an extension of the law of principal and agent”. Explain

Section 6 of the Partnership Act, specifies that in determining whether a group of persons is or is
not a firm, or whether a person, is or is not a partner in a firm, regard shall be had to the real relation
between the parties shown b all relevant facts taken together. The intention of the partners will have
to be decided with reference to the terms of the agreement and all the surrounding circumstances.
The true test in determining the existence of partnership is ‘Agency and Authority’. In determining
the existence of partnership, it is essential to find out the real intention of the parties to the
agreement and circumstances of the case. The question to be asked is – Whether the relation of
principal and agent exists between the parties? Section 18 also provides that subject to the
provisions of Partnership Act a partner is the agent of the firm for the purposes of the business of
the firm.
In Cox Vs. Hickman it was held that the receipt by a person of a share in the profit is a prima-facie
evidence that he is a partner but this is not a conclusive test the question whether a person is a
partner or not therefore depends in all cases upon whether or not he has the authority to act for other
partners and whether or not the other partners have the authorities to act for him. Thus a partners
assumes a dual role; (a) he is an agent of the firm with regards to third parties and can thus bind the
firm by his acts. (b) he is principal in respect of the act of the other partners.

5
1.3 Scope and Objectives
In Partnership Act every partner owes a specific duty toward the firm. So in order to keep the
behaviour of every partner, the conduct of Firm’s smooth running business the check the
partnership act was enacted.
The scope of this project is to study the Partnership Act thoroughly and the case laws related to
that to find if there are any further chances of improvements of any loop holes.

1.4.Methodology
In this paper only secondary data source is used. The data such as case laws, sections mentioned
in law or bare act, statistics and already done work by different authors or researchers.

2.What Is The Nature Of Partnership?

Association is a type of business association , where at least two people consolidate for mutually
continuing some business. It is an improvement over the 'Sole – exchange business ', where one
single individual with his very own assets, expertise and exertion carries alone business. Because of
the impediment of assets of just a solitary individual being engaged with the sole-exchange
business , a bigger business requiring a larger number of ventures and assets than accessible to a
sole-dealer, can't be thought of in such a type of business association. In organization, then again ,
various people could pool their assets and endeavours and could begin an a lot bigger business, than
could be managed by any of these accomplices separately . In the event of misfortune the weight
gets isolated among different accomplices in a Partnership.

2.1.Criteria Of Partnership :

Any two or beyond what two people can consolidate for making Partnership. Area 11 of the
Companies Act , 1956 forces limit as to most extreme number of people in an association to carry :

· Banking Business – There can be limit of 10 people

· Any other reason – There can be limit of 20 people.

On the off chance that the quantity of individuals in any affiliation surpasses the above expressed
point of confinement , that must be enrolled as an organization under Companies Act ,1956
generally that will be viewed as an illicit affiliation.

As against organization, where the most extreme number of accomplices can be 10 or 20 , relying
upon the idea of association business, there could be a lot bigger number of individuals in an
organization.

· In Private Company – Here there can be limit of 50 individuals

· In Public Company - Here there is no such farthest point to the most extreme number.

Accordingly , if an a lot bigger business than could be managed by just 10 or 20 people , is tried to
be carried on , an organization works out to be preferred type of business association over
organization . For example , there could be an open organization having 1,00,000 individuals ,
every single one of them having contributed just Rs.10 , and consequently having a capital of Rs.

6
10,00,000 for its business. A Company , as a type of business association might be superior to an
organization in another manner too. It is a counterfeit individual, particular from its individuals ,
and has any longer life than that of an association, though the organization being only a total of the
considerable number of accomplices, association has a lot littler range of life than an organization.
On account of a Company, the obligation of a part (investor) is constrained to the degree of the
measure of offers obtained by him, though if there should be an occurrence of Partnership, the
obligation of each accomplice in boundless, and this factor is of extraordinary preferred standpoint
in the event of a Company , from the perspective of danger of financial specialists in the business.

2.2.Introduction of a partner
(1)subject to contract between the partners and to provisions of section 30, no person shall be
introduced as a partner into a firm without the consent of all the existing partners.
(2) subject to the provisions of section 30, a person who is introduced as a partner into a firm
does not thereby become a liable for any act of the firm done before he became a partner.

Introduction of new partners- express power of a senior or principal partner to introduce one or
more new partners, named or not named, under agreed conditions, is in fact a constantly given by
partnership articles. A person duly nominated under such a power acquires rights in the partnership
property, which the court will enforce by way of appropriate specific relief1, though it cannot
enforce an agreement to enter into partnership, because the foundation of partnership is mutual
confidence, which the court cannot supply where it does not exist.
The words "without the consent of all the existing partners" indicate that the introduction of a new
partner is based upon the consent of the existing partners. This requirement is, however, subject to
the contract between the partners as stated in the opening words of the section. Accordingly if the
agreement provides that a senior or any other partner shall have the right to introduce a new partner
at any time, then the contract will be binding on the partners. In the case of the partnership
consisting of only two partners, if one of the partner dies, the partnership would be dissolved under
section 42(c) and it would be contradiction in terms to say that there can be a contract between two
partners to the effect that on the death of one of them the partnership will not be dissolved by will
continue2. No heir of the deceased partner can become a partner with the surviving partner except
with the latter’s consent express or implied.2
An incoming partner is subject to the terms of the partnership, though he may not be bound by a
special term of which he had no notice.3
Liability for old debts of partnership on incoming partner, extent of- whether an incoming partner
could be made liable personally for the arrears of sale tax accrued prior to his induction as a partner
of the firm if the question that came up for consideration in the case in Vinod Babu v. District
collector4 before the Kerala high court. Section 31(1) states that subject to contract between the
partners and to the provisions of section 30, no person shall be introduced as a partner into the firm
without the consent of all existing partners. Section 31(2) stipulates that the subject to the
provisions of section 30, a person who is introduces as a partner into a firm does not thereby
become liable for any act of the firm done before he became a partner. Sub-section(2) provides that
where a person has been introduced as a partner into an existing firm, he does not thereby become
liable for any act of the firm done, any obligation of the firm incurred, before he becomes a partner
therein. Each partner becomes a partner of the firm for the future and hic present connection with
the firm is no evidence that he ever expressly nor impliedly authorised what may have been done
prior to his admission even if an incoming partner agrees with is co-partners that the debts of the old
firm shall be taken by the new firm , as regards strangers, res inter alios acta, it does not confer

1
Byrne v. Reid,(1902) 2 Ch. 735 C.A.
2
Commissioner of Income tax M.P. v. Seth Govind Sugar Mills, AIR 1966 SC 24: (1965) 3 SCR
2
488 : (1965) 2 SCJ 289
3
Austen v. Boys, (1857) 24 Beav. 598,606 : 27 LJ Ch. 714
4
2005 (4) KLT 412

7
upon them any right to fix liability for the old debts on the new partner. In order to render an
incoming partner liable to the creditors of the old firm, there must by some agreement, express or
tacit to that effect between him and the creditors and on some sufficient considerations5. A new
partner does not by the mere fact of his introduction into the firm become liable for any act of the
firm done before he became a partner. Arrangements however, for transferring debts from the
member of an old firm to the new firm are not uncommon, and if assented to by the old creditors,
may constitute a complete novation6. Where the business is carried on continuously, the creditor,
knowing the change, both
the assumption of the existing debts by the new partners and the assent of the creditors to accept
them as debtors and to discharge the retiring partners will be rather easily inferred7. An incoming
partner becomes liable for an existing debt where the following two conditions are fulfilled:
(1) where the new firm constituted by his introduction has agreed to take over the liability of the
old firm, and
(2) where the creditor had agreed to discharge the old firm, and to accept the new firm as his
debtors; in other words, unless there is a tripartite contract.

2.3.Organization Agreement – Oral , Written Or By Conduct

The Supreme Court has , interpreting the arrangements of area 4 , saw that an organization
understanding is the wellspring of an association , and it likewise offers articulation to different
fixings characterizing the organization , determining the business consented to be continued ,the
people who will really carry on the business , the offers in which the benefits will be separated , and
a few different contemplations which establish such a natural relationship . An association
understanding in this manner , distinguishes the firm and every organization understanding may
comprise a particular and separate organization. This shouldn't imply that that a firm is corporate
element or appreciates a juristic identity in that sense. Anyway , every organization is an
unmistakable relationship. The accomplices might be extraordinary but the idea of the business
might be the equivalent , the business might be unique but the accomplices might be the equivalent.
The aim might be to establish two separate organizations and along these lines , two particular
firms , or to expand just an association , initially comprised to carry on one business , to the
carrying on of another business. The goal of the accomplices should be chosen with reference to the
terms of the understanding and all the encompassing conditions , including proof with regards to the
joining or interlocking of the board , account and , different occurrences of the separate business.8

Understanding of organization need not to be express , but rather can be gathered from the course of
lead of the gatherings to the understanding. The firm guideline is that once the gatherings going into
the association are unmistakably portrayed in the instrument , there is no extension for further
request to discover by some procedure or trick , if any of the gatherings has got commitment to
others to induct those others to whom any of the gatherings might be responsible in law , into the
field of organization and for regarding them as accomplices under the law.9 If , the gatherings to an
understanding have not concurred on the date of initiation of the organization , it can't be said that
they have progressed toward becoming accomplices.

5
Russia Engineering Works v. Kanara Transport Co., (1926) 41 Mad 930 : IC 257 : AIR 1926 MAD 1138
6
See notes to section 62 of Indian Contract Act
7
Rolfe v. Flower, (1866) LR 1 PC 27, 40: see section 32(2)
8
Deputy Commr Of Sales Tax (Law) Board Of Revenue (Taxes) vs. K Kelukutty AIR 1985 SC 1143 , from (1978) 2
ILR Ker 82
9
CIT v Kedarmal Keshardeo AIR 1968 A&N 68 ; Aruna Group Of Estates , Bodinayakanur v State Of Madras (1962) 2
Mad LJ 294.

8
The Supreme Court, in Tarsem Singh v Sukhminder Singh[12], has held that it isn't essential under
the ;aw that each agreement must be recorded as a hard copy. There can be a similarly restricting
contract between the gatherings based on oral understanding, except if there is a law which requires
the consent to be recorded as a hard copy.

The relations bury se , among the advertisers of an organization , are not equivalent to the relations
between accomplices. People going into contract are not , on the specialist of Keth Spicer Ltd v
Mansell, fundamentally to be seen as accomplices. Anyway , on the off chance that they play out an
expansive number of goes about as a component of the advancement , the court may reach an
alternate resolution.

2.4Retirement of an accomplice

(1) an accomplice may resign

(a) with the assent of every single other accomplice,
(b) as per an express understanding by the accomplices, or
(c)where the organization is freely, by pulling out recorded as a hard copy to the various
accomplices of his goal to resign.

(2)A resigning accomplice might be released, from any risk to any outsider for demonstrations of
the firm done before his retirement by an understanding made by him with such outsider and the
accomplices of the reconstituted firm, and such understanding might be suggested by a course of
managing between such outsider and the reconstituted firm after he knows about the retirement.

(3)Notwithstanding the retirement of an accomplice from a firm, he and the accomplices comprise
to be obligated as accomplices, to outsiders for any demonstration done before the retirement, until
open notice is given to the retirement:

given that a resigned accomplice isn't obligated to any outsider who manages the firm without
realizing that he was an accomplice.

(4) notices under sub-area (3) might be given by the resigned accomplice or by any accomplice of
reconstituted firm.

Retirement of an accomplice – "resign" is bound to situations where an accomplice pulls back from
a firm and the rest of the accomplices keep on carrying on the matter of the firm without
disintegration of organization between them . This would be an exchange and not retirement.

Three different ways of resigning a partner may resign

(1)where every one of the accomplices agree to his retirement;

(2) where it is a piece of the organization understanding that an accomplice may resign without
looking for a disintegration of the firm; and

(3) where the organization is freely , by pulling out recorded as a hard copy to all the different
accomplices of his expectation to resign.
Illustration
A,B,C are partners. D is their creditor. A retires, and a new partner X is introduced into the firm. X
agrees to take over the liability of A. D, the creditor, agrees with A, and the reconstituted firm of the
B,C and X, that he will look only to the new firm for the payment of his debt . A, the retiring partner
is discharged from the liability to D.

9
Unless, therefore, there is no novation a partner who retires does not cease to be liable for the firm's
liabilities incurred before his retirement. A partner of a firm that had infringed a trademark is liable
for damages , though he may be retired before the suit for damages was filed. A partner remains
liable for damages, though he had retired before the institution of the suit10. He remains liable on all
contracts entered into on behalf of a firm until the partnership affairs are wound up: or such
liabilities are discharged, and this is so although he may be only a sleeping partner.11

Extent of continuance of liability of partner after retirement to a pre-existing debt of creditor-

retirement of a partner is effected when a partner retires by following any one of the modes as
prescribed under section 32(1) of the said Act and such retirement is not controlled and/or subject to
the rigor as contained in subsection (2) or subsection (3) of section 32 of the said Act. Both
subsection (2) or subsection (3) of section 32 deal with the liabilities of the retiring partner after his
retirement. Subsection (2) of section 32 of the said act provides that the retiring partner may be
discharged from any liability to any third party for the 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 in course of dealing between such third party and reconstituted firm
after he has knowledge of the retirement. Subsection (3) of section 32 of the said act provides that
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 knowledge that he was a
partner. The said provision thus provides that the liability of a retiring partner to the third party will
continue even after retirement until public notice is given of the retirement.12

However under section 32 (2)under partnership act, partner even after the retirement from the firm
will be liable to be a third party in respect of any pre-retirement transaction or liability, unless he is
discharged from such liability by an agreement made by him with third party and surviving partners
of the re constituted firm. It is not sufficient to intimate the registrar of the firm. But also need
published be in gazette and newspaper.13

10
Thomas Bear & Sons v. Rulai Ram, AIR 1934 Lah 625 : 148 IC 763
11
Court v. Berlin, (1897) 2 Qb 396 CA : 66 IJ 714 : 77 LT 293 : 46 WR 55
12
Sri Gaur Karuna Dey and Ors. v. Sri Nemai Dey and Ors., 2008 (3) CHN 590 : 2 (2008) CLT 537.
13
Ram Bhat v. Leela ram Shevaram (India) pvt. Ltd., ILR 2006 (4) Kerala 127 :2006 (4) KLT 609.

10
2.5.Right of outgoing partner in certain cases to share subsequent profits-

Where any member of a Firm had died or otherwise ceased to be a partner, and the surviving
partners carry on the business of the firm with the property of the firm without any final settlement
of accounts as between them and the outgoing partner or his estate, then, in the absence of a
contract to the contrary, the outgoing partner or his estate is entitled as 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 the interest at the rate of six
percent per annum on the amount of his share in the property of the firm.

Provided that where by 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.

Duties between continuing and outgoing partners- various questions have arisen where a retiring
partner or deceased partner's has been left in the firms business without any settlements of accounts.
This section has been enacted in accordance with the result of a long series of authorities42. If there
is no special agreement the outgoing partner or his representative may claim at his or their option
“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 firm”, (but experience is not favourable to this method), or interest at the rate is six
per cent per annum on the amount of the share. The outgoing partner is entitle to elect between
profits and interests after his share has been ascertained.43 If there is an agreement that the
continuing partner shall take over the share of a deceased partner at a proper valuation, the
representative of the deceased partner can insist that the purchase shall stand subject to correction of
the valuation which is incident to the purchase.44 (see proviso to section 37 of the act). But if there
is no such agreement and a continuing partner takes, when he is not bound to take the share of a
deceased partner at an undervalue, the representative of the deceased partner cannot compel him to
retain it at a proper valuation. His proper remedy is to have the account settled on principles enacted
in this section45. But where the surviving partner does not carry on this business, but carries on
another though similar business, this section has no application.46

The share referred to in this section is the share actually used in continuing the business and not the
entire share of the deceased partner in the assets of the firm. Legal representatives are not bound to
exercise option before the profits are ascertained.47

Under section 37 of the act, the legal representative of the deceased partner has a claim either for
profits or for interest at 6% for the exclusive use of money or assets belonging to a firm by one or
some of the partners. Thus, he cannot claim a share in some of the assets of business, without
admitting his liability in the firm. What section 37 speaks of is a share of in profits made and not a
share of the assets only and completely leaving liabilities out of accounts.48

42
See Ahmed Musaji v. Hasim Ebrahim,(1915) 42 IA 91, 42cCAl 914, 28 IC 710.
43
Mansha ram v. Tej Bham, AIR 1958 P&H 5.
44
Hordern v. Horden, (1910) AC 465.
45
Sivagnanathammal v. Nallaperumal,(1934) 67 Mad LJ 880, 155 IC 783, AIR 1935 Mad 165.
46
Mohanasundaram v. Neelambal, AIR 1955 Mad 442 : (1955) ILR Mad 1154.
47
Kasi v. Ramanathan Chettiar, AIR 1949 Mad 693.
48
Sahul Hamid v. Sulthan, AIR 1947 Mad 287 at 291, Para 17

11
“Or otherwise ceased to be a partner.”- This expression has been applied to a partner who becomes
an alien enemy on the outbreak of the war.49
Surviving partner not a trustee. – Surviving partner at a times is described as a trustee for the
deceased partner’s representatives in respect of partnership. Sir Frederick Pollock has observed50
that the use of the word ‘trustee’ in this connection is an inaccurate expression. As we have seen on
dissolution by death of a partner, his representative is entitled to ask the surviving partners to
account for the deceased partner’s share as it stood on his death and to have his claim satisfied of
the assets of a dissolved partnership after discharging all liabilities incurred before dissolution as
well as only such liabilities incurred thereafter by the surviving partners as are incidental and
necessary for the winding up of the business(section 47).
After dissolution of Partnership by death of a partner the obligations of the surviving partners to
the legal representative of the deceased partner are not more onerous than those of a partner to his
other partners in running partnership. The surviving partners are not trustees for a deceased
partner’s legal representative nor liable to them otherwise than as debtor, though the obligation is
one in the nature of trust. The surviving partners have themselves an interest in the assets of
dissolved firm and all that law requires is that there should be no conflict between their interest and
their duty to legal representative and they should not gain an unfair advantage over the latter.51
Forfeiture clause. – The due exercise by the continuing firm of an option (such as is often given by
partnership articles) to buy out the share of the late partner exclude any further claim to an account
of profits. The existence of such an option has no effect if it is not exercised I accordance with its
terms. The surviving partners are not trustees for an outgoing partner or a deceased partner’s
representatives. Whatever is due on that account is a debt and nothing else than an ordinary debt,
and as such it is subject to the ordinary law of limitation of actions.52
Where surviving partner is a trustee. – More complicated questions may arise if a continuing partner
is personally responsible as a trustee to the person interested in late partners shares; his liabilities in
that capacity must be carefully distinguished from that which he may incur as a partner. The
principle is “That a trustee who uses trust money in trade must account for the profits which he
makes by that use of it.”53
Interest- The ordinary rule is to allow interest only from the date when the amount due is
ascertained but the interest may be allowed from the date of the filing of the plaint if the debtor
partner has been guilty of misconduct.54
Manner of valuation of the share of a retired partner- see commentaries under the same sub topic
under section 32.

49
Hugh Stevenson & Sons Ltd. v. Aktiengesellschaft fur Cartonnagen Industries, (1918) AC 239: (1917) 1 KB 842.
50
14th Ed., p. 119
51
Kasi v. Ramanathan Chetteiar, AIR 1949 Mad 693 : (1949) 1 MLJ 298.
52
Knox v. Gye, (1872) LR 5 HL 656, 675.
53
Vyse v. Foster, (1874) LR 7 HL 318, 329
54
Thulasi ammal v. Ramanchandra, AIR 1955 Mad 171 : (1955) ILR Mad 1115.

12
3.Conclusion
It was an amazing experience to complete this project on Incoming and Outgoing Partners in a
Partnership Firm. As I explained in the paragraphs before a Partnership emerges from an agreement.
With the help of the aforementioned facts and data we can say that a Partnership firm is in
anyway, much better than any other form of business. The partnership firm plays an important
role for the profit earning motive of the people. The Partners are very important for the
functioning of the firm as they are its pillars. The partners do have several authorities and powers
on behalf of the firm. Their action directly affects the functioning of the firm. The parties
involved in the functioning of the firm can be different from the partners. The partners also have
certain duties and are liable toward the third parties. The liability of the partners against the third
parties can depend upon the extent of the authority of the parties.

13
4.Bibliography
BOOKS
POLLOCK & MULLA on the Sale of Goods Act and The Indian Partnership Act, edition 10th ,
Bombay, N.M. Tripathi, 1966.

Internet websites
http://www.legalservicesindia.com/article/158/Indian-Partnership-Act,1932.html
https://indiankanoon.org/doc/171398/

14