Section 32-38 – A partner may cease to be a partner in following ways:
- By retirement
- By expulsion
- By insolvency
- By death
1. Retirement of a Partner
Retirement means voluntary withdrawal. According to the Section 32(1), a partner may retire – a) With the consent of all the other partners. Such consent may be express or implied.
b) In accordance with express agreement by the partners.
c) Where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. Here, a partner also has right to get the firm dissolved by giving a notice to all other partners of his intention to dissolve the firm.
– A firm is not dissolved on the retirement of a partner, if a partner retires the partnership between remaining partners can continue and they can still carry on the business of the firm. For this, it is necessary that after retirement, there must be at least two remaining partners between whom the partnership is now to continue.
The decision in Abbas Bhai v. R.G. Shah does not appear to be in accordance with law and needs re-consideration. Here, the Bombay High Court held that if on the retirement of all the partners but one the remaining one partner continues the business the firm is not dissolved thereby and old partnership continues. The analogy of Section 41(a) should be applicable to such a situation, which states that “a firm is compulsorily dissolved by adjudication of all the partners or of all the partners but one as insolvent”.
Thus, if all the partners or all except one retire the firm has to be dissolved.
Liability for acts done before retirement
If liability has arisen during the period while the person was a partner. Such liability does not come to an end by his retirement. However, Section 32(2) states that “a retiring partner may be discharged from the liability to any third parties for an act done before his retirement by an agreement with the third party and the partners of the reconstituted firm. Such an agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had the knowledge of retirement”.
The procedure mentioned in Section 32(2) for discharging a retiring partner from the liability is by way of novation which means substitution of a new debtor with that of old one with consent of the creditor. This is done by substituting a new contract in place of old one thereby discharging the liability of the original debtor and creating that of a new one in his place, it is essential that creditor must agree to such substitution.
In partnership when the creditor accepts the security of continuing partners in discharge of that of former partners the outgoing partner is thereby discharged from the liability toward creditors.
Section 32(2) requires that there should be contract between all the three parties viz. the outgoing partner, the members of reconstituted firm and the creditors. Mere agreement between the outgoing and continuing partners that only continuing partners will be liable for all past acts does not discharge the outgoing partner from his liability toward the creditor. Such an agreement need not always be express, it may be implied by course of dealing between such third party and the reconstituted from after he had knowledge of retirement. In order to be absolved from the liability the retiring partner has to prove that the creditor acquired to that position and consented to get his dues satisfied from newly constituted firm –
(Jayanti Lal v. Naran Das)
In Evans v. Drummond, A and B two parties in the firm executed a bill in favour of creditor and A retired and on due date bill was not paid to X but a new bill only signed by B was given to X who fully knew of the change in the firm, it was held that by accepting the new bill signed only by continuing partner, the creditor has relied on sole security and had discharged the retiring partner from liability.
Liability for act done after retirement – Section 32(3) & (4)
Section 32(3): Notwithstanding the retirement of a partner from a firm he and the partners continue to be liable to third parties 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 (dormant partner).
Section 32(4): Notice may be given by retired partner or by any partners of the reconstituted firm.
According to Section 72, a public notice means a notice in official gazette, in at least 1 vernacular paper circulating in the District, if the firm is registered, to the Registrar of the firm concerned. Therefore, merely publication of notice in a local newspaper is not sufficient and such a notice does not absolve the outgoing parties from liability toward a third person (C. Assiamma v. State Bank of Mysore).
The liability which arises in the absence of public notice is nothing but the application of doctrine of holding out. There is a presumption that a person who was known to be a partner continues to be so known to third party until notice of retirement is given.
If a dormant partner retires he is not liable for the acts of the firm done after his retirement even though no notice 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. (Tower Cabinet Co. v. Ingram)