Page 170 - DMGT407Corporate and Business Laws

Unit 6: Partnership Act and Limited Liability Act

subject to contract between the partners no change may be made in the nature of the business Notes
without the consent of all the partners. Thus, a change in the nature of the business can only be
brought about by the consent of all the partners. A change in the constitution of a firm takes
place when (i) a new partner is introduced as a partner in a firm (s.31), (ii) a partner retires from
a firm (s.32), (iii) a partner is expelled from a firm (s.33), (iv) a partner is adjudicated as an
insolvent (s.34), (v) a partner dies (s.35), (vi) a partner transfers his interest in the firm by sale,
mortgage or charge (s.29).

6.6.1 Rights and Liabilities of Incoming Partners

Section 31 provides that subject to a contract between partners and to the provisions regarding
minors in a firm, no new partner can be introduced into a firm without the consent of all the
existing partners. Such a partner enjoys all the rights as are conferred upon him by the Act and
by the contract between him and the existing partners. The liability of a new partner ordinarily
commences from the date when he is admitted as a partner, unless he agrees to be liable for
obligations incurred by the firm prior to that date. But such an agreement is binding only on the
partners and does not give the right to any creditor of the firm to sue the new partner for past
debts of the firm. This is because there is no privity of contract between the creditor and the new
partner. At the same time, the acts of the old partners cannot be ratified by the new partner. This
is in accordance with s. 196 of the Indian Contract Act, 1872, which provides that for the purpose
of ratification of agency, the principal must be in existence at the time when the act was done.
The new partner, however, would be liable for the acts of the old firm only if (i) the reconstituted
firm after his admission assumes the liabilities of the old firm and (ii) the creditors accept the
new firm as their debtor and discharge the old firm from its liability. The process of substituting
the old firm by the new firm is done by what is known as novation. Novation is the technical
term used in a contract for substituted liability, of course, not confined only to case of partnership.

6.6.2 Rights and Liabilities of a Retired Partner

An outgoing partner means a partner who has retired from a firm. The firm is reconstituted by
the remaining partners. Section 32 contemplates three ways in which a partner may retire from
the firm, viz., (i) he may retire at any time with the consent of all other partners; (ii) where there
is an agreement between the partners about retirement, a partner may retire in accordance with
the terms of that agreement; (iii) where the partnership is at will, a partner may retire by giving
to his partners a notice of his intention to retire. Section 32 clearly comprehends a situation
where a partner may retire without dissolving the firm.

Section 36 permits a retiring partner to carry on business competing with that of the firm and he
may advertise such business, but subject to a contract to the contrary, he cannot use the name of
the firm or represent himself as carrying on the business of the firm or solicit customers of the
firm after he has left. However, the partner may agree with his partners that on his retiring from
the firm, he will not carry on a business similar to that of the firm within a specified period or
within specified local limits. Such an agreement will not be in restraint of trade if the restraint
is reasonable. Section 53 provides for a similar rule to such an agreement in case of sale of the
firm’s goodwill. Further, the retiring partner has the right to receive his share of the property of
the firm, including goodwill, as the amount due to him is to be construed as a debt payable by
the firm.
Furthermore, s.37 provides that a retiring partner, where the continuing partners carry on the
business of the firm with property of the firm without any final settlement of account with him,
is entitled to claim from the firm such share of the profits made by the firm, since he ceased to be
a partner, as is attributable to the use of his share of the property of the firm. In the alternative,
he can claim interest at the rate of 6 per cent per annum on the amount of his share in the firm’s

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