A partnership firm undergoes reconstitution of the partnership in the event of the admission of a new partner, retirement of a partner or the insolvency of a partner. Sections 31 to 35 of the Indian Partnership Act, 1932 include the guidelines that govern the legal consequences of the retirement or admission of a partner. Let’s understand in detail the legal consequences of retirement or admission of a partner.
Admission or Introduction of a Partner Section 31
Before introducing a new partner in a partnership, it is important to obtain the consent of the existing partners. The new partner is not liable for any actions committed before his admission into the partnership. If the new partner is a minor, the provisions of Section 30 of the Partnership Act will apply.
Rights and Liabilities of a New Partner
The liabilities of a new partner commence from his date of admission into the partnership as a partner. He agrees to accept the liability for any obligations incurred by the firm before his admission into the firm.
The new firm may agree to take over the liability for the debts of the old firm and the creditors may accept the new firm as their debtor. This transition is possible only with the consent of the creditors. This substituted liability is called Novation and the consent of the creditors along with an agreement is needed for it.
The Retirement of a Partner Section 32
When a partner retires, he ceases to be a member of a partnership firm without ending the relationship between the other partners and the relationship between the firm and outside parties. The retirement of a partner does not mean that the partnership firm needs to dissolve. In case of dissolution, the withdrawing partner dissolves the firm.
A Partner in a Partnership Firm May Retire:
With the consent of the other partners
In accordance with an express agreement with the other partners
If the partnership is at will, a partner can retire by giving notice to other partners
Liabilities of a Retiring Partner
A retiring partner is liable to third parties until he or the other members of the firm give public notice of his retirement. In case the third party was not aware that the retiring partner was a partner of the firm, he is not liable to the third party.
The retiring partner continues to be liable to the third parties for any acts of the firm for the period when he was a partner at the firm. He can be absolved from such liability if there is an agreement to the contrary between him, partners of the reconstituted firm and the concerned third party. Such an agreement can be express or implied by the conduct post the retirement announcement of the partner.
In case of a partnership at will, the retiring partner can be relieved by giving notice to other partners, informing them about his intention to retire. Public notice is not mandatory in this case.
Expulsion of a Partner Section 33
A partner can be expelled from the partnership firm by other partners:
If the partners hold the power of expulsion through a contract between the partners
The power is exercised by a majority of partners
The power of expulsion is used in good faith by the partners
Expulsion of the partner does not lead to the dissolution of the firm. In the absence of the above conditions, the expulsion is not considered to be in the interest of the business.
For the Expulsion of the Partner to be in Good Faith:
The expulsion should be in the interest of the partnership
The firm must serve a notice to the partner before the expulsion
The partner being expelled must be allowed to present his side of the argument regarding the events that led to the expulsion
If the above conditions are not met, then the expulsion is not considered to be in good faith and is deemed null and void.
Insolvency of a Partner Section 34
When a partner is adjudged insolvent:
He ceases to be a partner from the date of being adjudged insolvent
His estate ceases to be liable for any acts of the firm from the said date
The firm is not liable for any acts of the insolvent partner
FAQs on Legal Consequences of Admission or Retirement of a Partner
Q1. What is the Liability of Estate of a Deceased Partner Section 35?
Ans. According to Section 35 of the partnership act, the death of a partner in a partnership firm leads to the dissolution of the partnership. However, if the partnership agreement includes the clause that the firm will not be dissolved in the event of the death of a partner, the remaining partners can continue with the partnership firm. The deceased partner’s estate, in this case, will not be liable for any future obligations of the firm. The firm doesn’t need to give public notice about the death of a partner. An exception to this case is when there are only two partners in a firm. In this case, the death of a partner leads to the dissolution of the firm by default unless a new partner is introduced.
Q2. A is a Partner in a Firm along with B and C. After the Death of A, will His Son D Become a Partner of the Firm by Default?
Ans. No, D cannot become a partner in the firm as a successor to the partnership after the death of his father. D needs the consent of the existing partners in the firm to be introduced as a new partner to the firm. This will lead to a reconstitution of the partnership. The heir of a deceased partner cannot become a partner in the firm without the express or implied consent of the other surviving partners.