RIGHTS OF OUTGOING PARTNERS
- Right to carry on competing business
- Right to share subsequent profits until the amount due to him has been paid
1. Right to carry on competing business
Section 36(1): An outgoing partner has a right to carry on competing business with that of
the firm and he may advertise such business but subject to three restrictions –
a) He cannot use the name of the firm.
b) He cannot represent himself as carrying on business of the firm.
c) He cannot solicit the customer or persons who were dealing with the firm.
The retired partner has the right to carry on any business competing with that of the firm. He may set up his new business at a place next door to the firm or anywhere else. This is necessary to assure freedom of trade to every individual.
But the interest of the firm which he has left also deserve protection. The Act therefore tries to assure that the retired partner should do nothing to injure the interest of the firm.
The restrictions are similar to those which are imposed on person who sells the goodwill
of his business, outgoing partner is presumed to have sold the goodwill to the remaining
partner and, therefore, the restrictions stated above are applicable to him. These restrictions are subject to contract between the outgoing and other partners.
Section 36(2): Agreement in restraint of trade – An outgoing partner may make an agreement with other partners that he will not carry on any business similar to that of the firm within a specified period or within specified local limits and notwithstanding anything contained in Section 27 of ICA such agreement shall be valid if the restrictions imposed are reasonable.
Thus the section allows restrictions on the trade liberty of the retired partner for a specified period or specified local limits and requires that the restrictions should be reasonable. A restriction is reasonable protection to the late partners having regard to the nature and extent of partnership business.
A restraint upon a doctor retiring from the firm of doctors not to practice within ten miles and for a period of 21 years has been held to be reasonable. (Whete Bill v. Bradford)
2. Right to share subsequent profit Section 37
When a partner ceases to be a partner his share in the property of firm may not be immediately paid to him and the firm may continue the business without any final settlement of account between the outgoing partner or his estate and the others. In such a case, Section 37 gives outgoing partner an option either.
To claim such share of profits made since he ceased to be a partner as may be attributable to the use of his share of the property of firm or to claim an interest at rate of 6% per annum on amount of his share in property of firm. If an arbitration awards grants interest 9% be instead of 6% p.a. it is an error and therefore this part of award will not be enforceable. (Nirmala Bai v. Girija Bai)
This is subject to contract between the partners to contrary. Where by contract the surviving partners or continuing partners purchase the share of outgoing partner/deceased partner, the right of sharing profit is lost.
If, however, the partner who was to purchase such share of outgoing or deceased partner does not comply with the terms of contract of purchase in all material respect, he is liable to account for the right of outgoing/deceased partner.