A PROJECT REPORT ON “LAW RELATING TO RETIREMENT OF A

PARTNER UNDER INDIAN PARTNRSHIP ACT, 1932”

MANIPAL UNIVERSITY, JAIPUR

SCHOOL OF LAW

SUPERVISED BY: SUBMITTED BY:

MS. SUNITA SINGH TANAY KHANDELWAL

ASSOCIATE PROFESSOR REG. NO.:161401106

B.A. LLB. (HONS.)

SEM-II

SEC-B

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 CERTIFICATE

THIS IS TO CERTIFY THAT TANAY KHANDELWAL OF B.A. LLB. SEMESTER 2 SECTION

- B HAS SUCCESSFULLY COMPLETED HIS LAW OF CONTRACT PROJECT UNDER MY
GUIDANCE ON THE TOPIC “LAW RELATING TO RETIREMENT OF A PARTNER UNDER
INDIAN PARTNRSHIP ACT, 1932 ” IN THE YEAR 2016-17.

IT IS FURTHER CERTIFIEDTHAT THE CANDIDATE HAS MADE SINCERE EFFORTS FOR

THE COMPLETION OF THIS PROJECT.

DATE: 30-01-2017 _________________

MS. SUNITA SINGH

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 ACKNOWLEDGEMENT

I have taken efforts to complete this project. However, it would not have been possible without the
kind support and help of many individuals. I would like to extend my sincere thanks to all of them.

I am highly indebted to MS.SUNITA SINGH MA’AM for her guidance and supervision. I would
also like to thank her for helping me find the necessary matter relating for this project. At last I
would like to thank my parents for their constant motivation and support.

TANAY KHANDELWAL

Table of Contents

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INTRODUCTION TO THE INDIAN PARTNRSHIP ACT, 1932.........................................................5

NATURE OF PARTNERSHIP..............................................................................................................5

PARTNERSHIP, PARTNER AND FIRM..............................................................................................5

OUTGOING PARTNER........................................................................................................................6

RETIREMENT OF A PARTNER..........................................................................................................6

LIABILITY OF RETIRING PARTNER................................................................................................8

RETIREMENT OF A DORMANT PARTNER...................................................................................10

BIBLIOGRAPHY...............................................................................................................................11

WEBLIOGRAPHY.............................................................................................................................11

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 INTRODUCTION TO THE INDIAN PARTNRSHIP ACT, 1932
The Indian Partnership Act was enacted in 1932 and it came into force on 1 St day of October,
1932. The present act superseded the earlier law relating to Partnership, which was contained
in Chapter XI of the Indian Contract Act, 1872. The Act is not exhaustive. It purports to
define and amend law relating to Partnership.

A Partnership arises from a contract, and therefore, such a contract is governed not only by
the provisions of the Partnership Act in this regard, but also by the general law of contract in
such matters, where the Partnership Act does not specifically make any provision. It has been
expressly provided in the Partnership Act that un repealed provisions of the Indian Contract
Act, 1872, save in so far as they are inconsistent with the express provisions of this act, shall
continue to apply. Thus, the rules relating to offer and acceptance, consideration, free consent,
legality of object, etc, as contained in the Indian Contract Act are applicable to a contract of
Partnership also. On the other hand, regarding the position of minor, since there is specific
provision contained in Section 30 of The Indian Partnership Act, the minor’s position is
governed b the provision of the Partnership Act.

NATURE OF PARTNERSHIP
Partnership is a form of business organisation, where two or more persons join together for
jointly carrying on some business. It is an improvement over the “Sole-trade business”, where
one single individual with his own resources, skill and effort carries on his business. Due to
the limitation of resources of only a single person being involved in the sole-trade business, a
large business requiring more investments and resources than available to a sole-trader,
cannot be thought of in such a form of business organisation. In partnership, on the other
hand, a number of persons could pool their resources and efforts and could start a much larger
business, than could be afforded by any of these partners individually. In case of loss the
burden gets divided amongst various partners in a Partnership.

PARTNERSHIP, PARTNER AND FIRM

Section 4 of The Indian Partnership Act, 1932 defines Partnership, Partner and Firm.

Partnership- It is a relation between persons who have agreed to share the profits of a
business carried on by all or any one of them acting for all.

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Partner- Persons who have entered into partnership with one another are called individually
partners.

Firm- Collectively all the partners are called Firm.

OUTGOING PARTNER
Section 32 to 38 deal with different ways in which a partner may cease to be a partner and his
rights and liabilities thereafter. These provisions pertain to situations when the outgoing
partner ceases to be partner, but the firm is not dissolved and it continues with the remaining
partners. A partner may cease to be a partner in the following ways:

1. By Retirement
2. By Expulsion
3. By Insolvency, and
4. By Death.

RETIREMENT OF A PARTNER
Retirement here means voluntary withdrawal of a partner from the firm, as opposed to
expulsion, when a partner is made to quit. It covers such cases where on the withdrawal of a
partner from the firm, the firm is not dissolved but the business of the firm is continued with
remaining partners.

How can a partner retire:

According to section 32(1), a partner may retire with-

a) With the consent of all the other partners,

b) In accordance with an express agreement by the partners, or
c) Where the partnership is at will, by giving notice in writing to all the partners of his
intention to retire.
 With the consent of all the partners:

As a general rule, no partner can retire whenever he likes. The partnership business depends
upon he continued support from all the partners. The retirement of a partner might mean a
serious dislocation of a whole business. A partner can, therefore, retire with the consent of all
the partners. Such consent may be express or implied.

 In accordance with express agreement by the parties:

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In case the agreement between the parties themselves condones the requirement of the
consent of them all, a partner may retire accordingly. For instance, the partnership deed
provides that a partner may retire with consent of the majority of other partners or by giving
one year’s notice, a partner can retire in accordance with such an agreement.

 In partnership at will by a notice to others:

In case of partnership at will, a partner may retire by giving a notice in writing to all the other
partners of his intention to retire. In a partnership at will, a partner has also a right to get the
firm dissolved by giving a notice in writing to all the other partners of his intention to
dissolve the firm.

The need for such a notice arises when all other partners either do not agree to the retirement
of a partner or they are not readily available to give their consent for the retirement of the
partner.

In case of partnership at will, a partner could also retire either under section 32(1) (a) with
consent of all the partners or under section 32(1) (b) in accordance with an express agreement
by the partners.

Section 24 of the Indian Partnership Act, 1932 provides that notice to a partner, who
habitually acts in the business of the firm of any matter relating to the affairs of the firm,
operates as notice to the firm. As a result, notice of retirement by a partner given to that
partner who habitually acts in business of the firm would operate as notice to the firm. It is
because firm inasmuch includes all partners, the notice would not said to be defective.

Case Law: Usha Gopirathnam v. Shri P.S. Ranganathan1

In this case a partner gave notice, by letter, written to another person who habitually was
acting in the business of the firm, expressly stating that he was desirous of retiring from the
firm and that accounts also be settled by assessing assets and liabilities of the firm. It was
held to be clear expression of his intention to retire.

Besides, the partners, from the date of retirement till his death, i.e., for 24 years, did not draw
any profits, nor any material was produced by the plaintiff filing the suit, for dissolution of
the firm, to show that the retiring partner drew his shares of profits during relevant period or
continued as partner till his death, would fortify the conclusion that the partner had retired
when he gave the notice of his intention to retire.
1 A.I.R. 2008 (NOC) 2137 (kar).

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 LIABILITY OF RETIRING PARTNER
 Liability for acts done before retirement [Section 32(2)]

Every partner is liable for all the acts of the firm done while he is a partner. If liability has
arisen during the period while a person was a partner, such liability does not come to an end
by his retirement. According to Section 32(2), however, this is a possibility of discharge of
the outgoing partner from liability for the past acts.

Section 32(2) is as follows:

“A retiring partner may be discharged from the liability to any third party for the acts of the
firm done before his retirement by an agreement made by him with such third party and the
partners of the reconstituted firm and such agreement may be implied by a course of dealing
between such third party and the reconstituted firm after that he had knowledge of the
retirement.”

The above mentioned procedure for discharge of a retiring partner from liability is by way of
novation. Novation means substitution, with the creditor’s consent, of a new debtor for an old
one. This is done by substituting a new contract in place of an old one, thereby discharging
the liability of the original debtor and creating that of a new one in his place. It is essential
that the creditor must agree to such substitution. In partnership when the creditor accepts the
security of continuing partners in discharge of that of the former partners, the outgoing
partner is thereby discharged from his liability towards such creditor. Sub-sec. (2) to Sec. 32
requires that for the proper discharge of the retiring partner from liability, there should be a
contract between all the three parties viz., the outgoing partner, the members of the
reconstituted firm and the creditor. Mere agreement between the outgoing and the continuing
partners that only the continuing partners will be liable for all the past acts does not discharge
the outgoing partners from his liability towards the creditor. The concurrence of the creditor
also must be there to such a contract. Such an agreement need not always be express; it may
be implied by a course of dealing between such third party (creditor) and the reconstituted
firm after he had the knowledge of the retirement. In order to be absolved of the liability, the
retiring partner, therefore, has got to prove that the creditor acquiesced in that position and to
get his due satisfied from the newly constructed partnership firm.

Case law: K.J. George v. State Bank of Travancore2

2 A.I.R. 2000 Ker. 214.

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This case is an example of novation whereby the retiring partner was discharged from his
liability towards the creditor bank. In this case the respondent bank granted overdraft facility
and medium term loan to a partnership firm which included defendant as partner. While the
amount still remained unpaid to the bank, the defendant retired from the partnership firm on
10-3-1983. The notice of the retirement of the partner was duly sent to the said bank.

Thereafter revival letters in respect of the loan and a subsequent agreement was entered into
between the bank and those partners who continued the business. The retiring partner was not
a party to the revival agreement entered by the bank with the firm after his retirement.
Moreover, the entire liability towards the bank was taken over by the continuing partners. The
bank also never required the defendant, i.e., the retiring partner to sign the revival agreement.

It was held that the bank had accepted that the partners of the reconstituted firm alone will be
liable for thee debts of the firm. The retiring partner was, therefore, discharged from his
liability towards the respondent bank.

Case Law: Evans v. Drummond3

In this case two partners of a firm executed a bill in favour of a creditor. One of them retired
and thereafter, on due date, the bill as not paid to the creditor. However, a new bill signed by
the continuing partner and sent it to the creditor, who fully knew the change in the firm. It
was held that the creditor has discharged the retiring partner from liability by accepting the
new bill signed by the continuing partner.

 Liability for the acts done after retirement[Section 32(3) & (4)]

Section 32, sub-sections (3) and (4) contain the following provisions on the subject:

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be
liable as partners to third parties for any act done by any of them which would have been an
act of the firm if done before the retirement, until public notice is given of the retirement:
provided that a retired partner is not liable to any third party who deals with the firm without
knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.

3 4 Esp. 89

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By retirement a person ceases to be a partner. The third parties can still presume mutual
agency between the outgoing partners and the continuing partners until a public notice of
retirement is given. Section 32(3), therefore, provides that in the absence of a public notice,
the outgoing and the continuing partners continue to be liable for the act of each other
towards third parties. In order to avoid such liability, it is in the interests of both the retiring
and the continuing partners that the public notice is given. It has, therefore, been provided in
sub-sec. (4) that such a notice may be given either by the retired partner or any partner of the
reconstituted firm.

RETIREMENT OF A DORMANT PARTNER

Proviso to Section 32(3) states that “a retired partner is not liable to any third party who deals
with the firm without knowing that he was a partner.”

If a dormant partner (i.e., a person who is not known to be a partner), retires, he is not liable
for the acts of the firm done after his retirement even though no notice of retirement has been
given. The basis for this provision is that if a person was not known to be a partner to a third
party, there is no need of notifying to such third party about his retirement either. The need
for notice arises if a person who was known to be a partner and his creditor does not know
about his retirement but still continues to believe that he is a partner and gives credit on that
behalf.

A person who is not known to be a partner in a firm cannot be said to owe any duty to give
notice of his retirement to persons who do not know that he has been a partner. The proviso to
Section 32(3) is to the effect that even where there is a failure to give the public notice, a
retired partner will not be liable to a third party who did not know of such person being a
partner and deals with the firm after such retirement.

Case Law: Tower Cabinet Co. Ltd. v. Ingram4

In this case Ingram and Christmas were partners in a firm known as Merry’s. The partnership
was dissolved but Christmas carried on the business in the same firm name. Public notice of
the dissolution of the firm was not given. Christmas placed an order on the old notepaper for
the purchase of some furniture from Tower Cabinet Co. sued Ingram to make him liable on
the basis of holding out. It was held that Ingram was not liable as Tower Cabinet Company
had no knowledge that Ingram was a partner before the date of dissolution. The mere fact that

4 (1949) 2 K.B. 397

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the retiring partner did not see to the destruction of the old notepapers bearing his name could
not make him liable for creditors with whom communications were made on such notepaper.

BIBLIOGRAPHY
1. Dr. R.K. Bangia; Contract-II; Allahabad Law Agency Law Publishers; Edition 2009

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2. Dr. S.R. Myneni; Contract-II (Special Contracts); Asia Law House, Hyderabad; 1 st
Edition 2010-11

WEBLIOGRAPHY
1. http://www.legalservicesindia.com/article/article/indian-partnership-act-1932-158-1.html
ON 25/01/2017 @9:40 p.m.
2. http://www.advocatekhoj.com/library/bareacts/partnership/retirement.php?
Title=Indian%20Partnership%20Act,%201932&STitle=Retirement%20of%20a
%20partner
ON 25/01/2017 @ 9:20 p.m.

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