Rights of an Outgoing Partner

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In a partnership firm when one of the partners leaves and the rest of the partners continue the business, the partner who leaves is an outgoing partner. The partnership law dictates certain rights and liabilities for such a partner. Let’s learn more about the rights of an outgoing partner. 

The Right of an Outgoing Partner to Carry on a Competing Business 

Indian Partnership Act, 1932 commonly known as the Partnership law allows an outgoing partner to pursue a business that is of a competing nature with the partnership firm. The law also allows for the promotion of the business. Subsection 1 of Section 36 of the Indian Partnership Act, 1932 forces certain limiting conditions. The Act limits him from doing the following.

  • He cannot use the partnership firm’s name.

  • He cannot represent himself as a member of the partnership.

  • He cannot solicit the customs of people who had been dealing with the firm before he ceased to be a partner. 

Subsection 2 of Section 36 of the Partnership Act mentions an agreement in restraint of trade. This subsection states that an outgoing partner may make an agreement with his partners that on ceasing to be a partner he would not carry on any business similar to that of the partnership firm within a stipulated period of time or an identified local limit. This is notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872. Such agreement shall be considered valid if only the restrictions imposed are reasonable.

The Right of an Outgoing Partner to Share Subsequent Profits

Section 37 of the Indian Partnership Act, 1932 defines the right of an outgoing partner to share subsequent profits under certain circumstances. This is applicable when any member of a partnership firm dies or otherwise ceases to be a partner and the surviving or continuing partners continue with the business of the partnership firm. There is no need for any final settlement of accounts, since the outgoing partner already entitles, either by himself or by his representatives, to share his profits made by the partnership firm. Moreover, the outgoing partner or his representative is entitled to use his share of the property of the firm or draw interest at the rate of six per cent per year on the amount of his share in the property of the firm.

However, the surviving partners or the continuing partners are given an option to purchase the interest of a deceased partner or outgoing partner, and if that option gets duly exercised, the deceased partner or the outgoing partner is not entitled to any other share of profits or further share of profits in the partnership firm.

Solved Examples on Rights of Outgoing Partner

Q1: Dave, Jack and Robert are partners in a gaming company. Robert retires after he sold his share in the partnership firm. But, Dave and Jack could not pay Robert the agreed value of the share. How would Robert be able to recover the amount?

Ans: The value of Robert’s share on the date of his retirement from the partnership firm will stay as a pure debt on the partnership firm. This debt shall be applicable from the date from which Robert ceased to be a partner of the firm according to the agreement between his partners and him. His share amount could be recovered by him along with interest on the amount he was supposed to be paid.

Q2: Dave, Jack and Robert are partners in company manufacturing shoes. Dave is entitled to two-sixths of the property of the partnership firm and the profits earned by the firm. After three years of the business, Dave goes bankrupt, but Jack and Robert carry on with the business without paying out Dave’s share of the assets of the firm or settling the accounts with Dave’s estate. Would Dave get a share of the profits earned?

Ans: Yes, Dave would get his share of profits from the firm. He is ideally entitled to two-sixths of the profits of the firm from the date he went bankrupt till the final liquidation of the partnership.

Q3: Is an out-going partner allowed to continue with a business that competes with the partnership firm?

Ans: Yes, an out-going partner can continue to carry on a business which could be a competitor of the firm. He could also advertise it. 

Q4: Discuss the rights and duties of an outgoing partner.

Ans: An outgoing partner enjoys his right to continue with a business which competes with the partnership firm and even advertise it. It is his duty not to use the name of the partnership firm, not to represent himself as a member of the firm. He shouldn’t take the name of the firm to introduce himself anymore, and he should avoid soliciting the custom of persons who have been dealing with the firm from before he started ceasing to be a partner.

Q5: Which Section of the Indian Partnership Act, 1932 deals with the right of an outgoing partner in certain circumstances to share future profits?

Ans: Section 37.

Q6: Section 36(1) of the Indian Partnership Act, 1932 deals with the agreement in restraint of the trade. TRUE or FALSE?

Ans: FALSE. It’s subsection 2 of Section 36 which deals with the same.