Explain the term the procedure of admission or retirement of a partner in partnership deed. Why is it important? What is the best way to describe the term in agreement? Explain with the help of an example.
Whenever there are any changes in the relationship between the partners or the addition or removal of a partner from a partnership firm, it causes the reconstitution of the respective partnership firm. Hence, during the admission or retirement of a partner, a partnership firm is bound to be reconstituted by altering the rights and liabilities of the existing partners.
In this article, we have discussed the entire procedure and the underlying changes of admission or retirement of a partner in an existing partnership firm.
Admission of Partner
As subject to section 30 of The Indian Partnership Act, 1932, no one can be introduced as a partner of the respective partnership firm until and unless agreed by the other existing partners. The partnership firm’s cardinal principle is the existence of a mutual agency among all its partners. However, the person being introduced as a partner of an existing partnership firm will not be liable for any acts of the respective firm that have been done before their admission.
Rights and Liability of a Newly Admitted Partner
The rights and liabilities of a new partner get approved from the date when they are admitted as a partner in the respective partnership firm. If the new partner agrees to be liable for all the obligations incurred by the respective partnership firm before the date of admission, then and only they will be liable for the same. When a new partner is admitted to a partnership firm, he automatically gets the right to share the respective firm’s assets, liabilities, and profit.
During the entire admission procedure, the new partnership firm (including the new partner) must agree to carry forward all the debits and credits of the old partnership firm. And hence, all the creditors of the old partnership firm may discharge all the old partners and accept the new partners as their debtors. However, it should be noted that to operate all these transactions, the creditor’s consent is extremely important.
Mr A is admitted to the XYZ partnership firm with the consent of all its existing partners. Once Mr A is successfully admitted to the partnership firm, from that day onwards, he will be obliged for all respective activities.
Retirement of Partners
According to Section 32(1) of the Indian Partnership Act, 1932, a partner of an existing partnership firm can successfully retire only with the consent of all the other partners of the respective partnership firm. The retiring partner needs to have an expressed agreement concerning all the firm’s other partners. In case of a partnership at will, the retiring partner must provide a written legal notice to all the other firm partners stating his intention to retire from the partnership firm.
Once the partner is retired from the partnership firm, they are not liable to any third party dealing with the firm. Such an agreement is implied once the partnership firm is reconstituted. However, the retiring partner will be liable for all his past acts before the retirement until they give the public notice. As mentioned in section 32 (2) of this act, the public notice can be given by the retiring partner or any other partner.
Rights and Liability of the Retiring Partners
As mentioned above, until and unless the retiring partner provides the public notice, they continue to be liable for all the acts done by the respective partnership firm even after the retirement. The liability continues until the public notice of their retirement is given. A retired partner is not liable to any third parties dealing with the partnership firm without knowing that they were a partner.
Such a kind of agreement between the partners may be implied by a course of dealings between the reconstituted firm and the third party. In the partnership at will, if the retiring partner does not provide a written notice intending his retirement, he will continue to be liable for all the acts of the respective partnership firm.
Vishnu Chandra Vs. Chandrika Prasad (Supreme Court)
In this case, it was held that the expression ‘if any partner wants to dissociate from the partnership business’, in a clause of the respective partnership deed which was being construed, reflects a situation where a partner wants to retire from the firm. Here, the expression was indicating that even after retirement, the partnership won’t come to an end.
Expulsion of a Partner
According to section 33 of the Indian Partnership Act, 1932, a partner may not be expelled from an existing partnership firm only after successfully fulfilling the test of good faith. The test of good faith is defined under section 33 (1) of this act and needs to fulfil the following criteria:
- Expulsion must be in the interest of all the partners
- The partner to be expelled is being given notice regarding the same.
- The expelling partner needs to get an opportunity of being heard.
If the partner is expelled without fulfilling the test of good faith, the expulsion will be nullified and void. If the expulsion of a partner is invalid, the respective partnership firm continues to exist as before. It should be noted that the expulsion of a partner or partners does not always lead to the dissolution of the respective firm.
Why is it Important?
When an old partner of a partnership firm retires, admitting a new partner becomes essential to undergo and manage all the firm’s activities. Also, when a new partner is admitted to a partnership firm, the respective firm gets additional capital, and the business keeps expanding with fresh energy. All the assets and liabilities are revalued when a partner is admitted or retired from an existing partnership firm. Hence, the firm knows the true value of all its assets and liabilities.
In a partnership firm, there is a mutual agency among all its partners; hence, they are mutually bound to all the firm’s transactions. Anyone can be a partner of the existing firm only after having the consent of all the other partners. In the same way, any partner retiring from the partnership firm can retire only with the consent of all the other partners. The incoming and outgoing partner is bound with all the rights and liabilities only when they are the firm’s partner.
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