Incoming and Outgoing Partners

Incoming Partner: A new partner who will be joining the partnership firm.

Partners to a firm are free to develop any procedure or understanding for inducting a new partner into their firm. Such a method can be included in the partnership agreement.

The following rules will apply in the absence of any agreement. i. New partner to be introduced into an existing partnership firm with the

consent of all the partners.ii. If there are senior partners (i.e. who have contributed the bulk of the

capital in the firm or who founded of the business) they can induce new partners.

iii. Incoming partner is only liable for the transactions which were made after he has joined the firm. [Rules on incoming partner are flexible.]

Retirement of a Partner:

(1) A partner can be retired with the consent of all the partners.(2) If there is any express agreement among the partners as to how an

outgoing partner will leave the firm then that agreement should be followed.

(3) In the case of Partnership at will: An outgoing partner can leave the firm by giving a notice to all the other partners of his intention to retire.

Discharge of Liabilities to Third Parties:

A retiring partner may be discharged from liability to a third party for the act of the firm before his retirement if

(i) There is such an agreement between him & the third party and the remaining partners in the reconstituted firm. Such an agreement can be express or implied.

(ii) The retiring partner & the other remaining partners will continue to be liable to the third parties (for the acts done on behalf of the firm before the retirement) until public notice is given.

(iii) The retiring partner will not be liable to the third party if such party deals with the firm without knowing that he was a partner.

Example: A partnership business is carried on by partners X, Y and Z. During the course of business the partners take a loan from A. Subsequently Z retires & a new partner K joins the firm. K along with X &Y agrees to take on the liability of the Z with regard to the said loan. Here A the creditor is no party to this arrangement. Z, the retiring partner is not discharged from his liability to A.

Expulsion of a Partner:

Power of expulsion to be exercised in good faith if these are given in the article of partnership.

(1) To be exercised by the majority of the partners.(2) The partner who is been expelled must be given the opportunity to

explain his conduct.(3) The expelled partner is on the same footing as an outgoing partner with

regard to existing liabilities.(4) The expelled partner is entitled to the entire amount of capital

contributed by him & share of all the profit up to the date of his expulsion.

Rights/Duties of Outgoing Partner to carry on the Business: An outgoing partner may carry on the business competing with that of the firm & he may advertise such business, but subject to the contract to the contrary he may not:-

(1) Use the firm name.(2) Represent himself as carrying on the business of the firm.(3) Solicit the customers of the firm in which is he was previously a partner.

Agreement in restrain of a trade: An outgoing partner can make an agreement with his partners not to engage in a business similar to that of the firm within specified geographic limits or within a specified time period.

Right of Outgoing Partner in certain cases to share subsequent Profits: u/s: 37

When a partner dies or retires without a final settlement of accounts with the other partners who continue in the business with partnership assets. Law is that such partner or his successors-in-interest will be entitled to such part of the subsequent profit as can be attributed to the use of his share of the partnership assets. As a second option: an annual interest @ 6% of the amount of the share.

Unlawful Expulsion of the Partner: A partner has been unlawfully expelled & the other partners are continuing with the partnership firm; without settlement of the accounts. Such expelled partner has instituted a suit for dissolution of partnership firm & settlement of accounts. The law laid down in section 37 will be application.

Assignment Question:

(1) Asim, Asif & Abid were in partnership as hairdressers. On 8 th April 2002 Abid retired from the partnership. A few days later, Asim and Asif bought, in the firm’s name an expensive laser hair dressing machine to replace their traditional machines. On 17thy April a van arrived with a delivery of seven hair dressing chairs. The van driver showed them a purchase order in the firm’s name, dated 3rd April and signed by Abid. Asim & asif are refusing to pay for the chair. They have also failed to pay for the laser hair dressing machine & the firm is severe financial difficulties. Both the suppliers are threatening. Are they bound to pay for both of the transaction? Discuss