Right of Outgoing Partners in Partnership Firm with Law

RIGHTS OF OUTGOING PARTNER IN PARTNERSHIP FIRM

Section 36 to 38 of the Partnership Act Deals with the law related to Right of Outgoing Partners.

1.1: – Rights of outgoing partner to carry on competing business Section 36 of Indian Partnership Act-1932 –

(1) an any outgoing partner from partnership firm may carry on a business competing, with that of the firm and he may advertise such business but, subject to contract to the contrary, he may not –

1. a) Use the firm name of Firm,
2. b) Represent himself as carrying on the business of the Partnership firm
3. c) Olicit the custom of persons who were dealing with the Partnership firms before he ceased to be a partner.

2) Agreement in restraint of trade – A partner may make an agreement (as per Indian Contract Act 1872) with his partners of Firm that on ceasing to be a partner he will not carry on any business of Profession similar to that of the firm within a specified period or within specified local limits; and., notwithstanding anything contained in Section 27 of the Indian Contract Act-1872 such agreement shall be valid if the restrictions imposed are reasonable.

Also Download Partnership Deed Format

1.2: – Right of outgoing partner in certain cases to share subsequent profits  as per Section 37 of Indian Partnership Act, 1932 –

 Where any member of a Partnership Firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the Partnership firm with the any property of the firm without any final settlement of the books of accounts as between them and the outgoing partner or his estate then, in the absence, of a contract to the contrary. the outgoing partner of firm or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner of Firm as may be attributable to the use of his share of the property of the firm or to interest at the rate of 6% (six) per cent per annum on the amount of his share in the any property of the firm.

In K.S. Rao v Venkateswarlu AIR 1997 AP 331 one of the partners left the firm and the firm was reconstituted with the remaining partners. The share of the outgoing partner continued to be utilised by the reconstituted firm. The earlier partnership deed had provided that a partner would get 12 % interest on the capital brought in by him. The outgoing partner claimed interest of 12% on his share remaining in the business after he left the firm.

It was held that on such sum remaining in partnership firm, the outgoing partner could claim interest of 6% p.a. (Six) as stated in Section 37 of this act and not any higher interest. The only other option available to an outgoing partner is to claim such share of profits as may be attributed to the use of his share of the property of the firm.

Provided that: where by contract between the partners of Partnership firm an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits,

but if any partner of firm assuming to act in exercise of the option does not in all material respects comply with the terms there of, he is liable to account under the foregoing provisions of this section 37 of this act.

1.3: – Revocation of continuing guarantee by change in firm as per Section 38 of Indian Partnership Act-1932:-

A continuing guarantee given to a Partnership firm or to a third party in respect of the transactions of a firm, is in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitutions of the Partnership firm In any contract of guarantee, it is necessary that subsequent to the making of the contract (as per Indian Contract Act), the terms should not be varied. Any variance in the terms, without surety’s consent, discharges the surety from liability as to future transactions. Similarly, in a contract of continuing guarantee (Section 129, Indian Contract Act) between a partnership firm and any third party. it is expected that the constitution of the firm will remain the same during the continuance of such a contract. If there is a change in the constitution of the firm either by the introduction of a new partner to the firm or by a partner ceasing to be one, any

continuing guarantee, given to the firm or to the third party in respect of the transactions of the firm, is automatically revoked as to future transactions unless there is an agreement to the contrary. The basis of the rule is that when there is continuing guarantee given to the firm or to the third party by the firm that is always with the assumption that the same persons who are partners at the time of such guarantee, shall continue to be there for the whole period of such guarantee.

Therefore, such a guarantee continues to be operative so long as there is no change in the constitution of the firm, but upon such a change the guarantee is revoked as regards future transactions. This point can be explained by referring to the case of Neel Comul Mookerjee v Bipro Das Mookerjee(1901) 28 Cal. 597. In that case, a guarantee was given for the conduct of the cashier of the firm known as “N.C. Mookerji.” Subsequently, there was a change in the constitution of the firm and its name was also changed to „ N. Mookerji & Son.in tbhis case‟It was held that on this change the guarantee was revoked and the surety was not liable for the conduct of the cashier subsequent to such change.

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