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Incoming and outgoing partners3

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Partnership Act 1961
Partnership Act 1961
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Incoming and outgoing partners3

  1. 1. Incoming and Outgoing partners By Dr. Sridevi Krishna Asst. Professor VVLC
  2. 2. Incoming partner • Section 31(1): no person shall be introduced as a partner into a firm without the consent of all the existing partners. This is subject to contract between the partners. • Section 31(2): subject to the provisions of section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm, before he became a partner. • Section 30(7) where a minor who has been admitted to the benefits of partnership, elects to become a partner after attaining majority, becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership.
  3. 3. Liability • An incoming partner will not be liable for any act of the firm done before he became a partner. • But he can contract with the existing partners that he will be remain for the past debts of the firm. • As regards the creditors, they can get this contract enforced only when they have given their clear consent to the effect that they exempt the old firm from the debts and will hold the new firm liable for the debts. • Thus complete novation is essential.
  4. 4. continued • For liability of new partner for existing debts following must be proved- • The new firm has taken the liability to pay the existing debts. • The creditors have exempted the debts of the old firm and have agreed or given their consent that they will realize their debts from the new firm.
  5. 5. Outgoing partner • A partner may leave the firm in any of the following ways- • With the consent of all other partners- section 32(1) (a) - a partner may retire with the consent of all other partners • With an express agreement by partners- a partner may retire by mutual agreement of the partners. The agreement must be express • Section 32(1)(b)- a partner may retire in accordance with an express agreement by partners.
  6. 6. Vishnu Chandra V Chandrika Prasad Agarwal • SC- whether plaintiff was entitled to retire from the firm on the basis of the partnership deed? • Para 18 of the deed provided that if a partner wanted to leave the firm he could do so by giving a month’s notice to other partners but in such a situation partnership business would not stop. • Para 20 provided that no partner will leave the firm within one year of the commencement of the business. In case he left the firm with in one year of the commencement of the business his capital shall not be returned by the end of one year. • SC observed- clause specifies that a partner may dissociate from the partnership is nothing but a situation where a partner wants to retire
  7. 7. Continued.. • The first part of section 18 confers a right on the partner to retire from partnership as envisaged by section 31(1)(b) of the act. • The second part of clause 18 provides for the consequence of such retirement by providing that even on such retirement the partnership will neither be dissolved nor the business will come to an end. • The court concluded that any partner may retire after giving a month’s notice. There is no prohibition from retiring within one year of the commencement of the business. The consequences of retiring within one year will be that the capital will not be returned by the end of one year.
  8. 8. By giving notice to all other partners in case of partnership at will • Section 32(1) ( c) a partner may retire where the partnership at will, by giving notice in writing to all other partners of his intention to retire. • Notice must be in writing and must express an intention to retire. • By Expulsion- section 33(1) a partner may not be expelled from a firm by any majority of the partners, save in the exercise of good faith of powers conferred by contract between the partners. • For a partner to be expelled by a majority of partners, two conditions must be satisfied- • Such power must have been conferred by contract between the partners. • The power to expel a partner conferred under the contract between partners must be exercised in good faith.
  9. 9. Insolvency of partner • Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not firm is thereby dissolved. • Section 42(d)- provides that subject to contract between the partners, a firm is dissolved by the adjudication of a partner as an insolvent. • Thus, the partners may by contract provide that the firm shall not be dissolved on the insolvency of a partner. • But as provided in section 34(1) whether the firm is dissolved or not, on adjudication of insolvency of a partner, he ceases to be a partner in the firm.
  10. 10. Continued. • Section 34(2) where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.
  11. 11. By death • Section 42(c ) : subject to the contract between the partners a firm is dissolved by the death of a partner. • Thus partners may by contract provide that on the death of a partner the firm will not be dissolved. But if there is no such agreement, the firm will be dissolved on the death of a partner. • Section 35- where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of the deceased partner is not liable for any act of the firm done after his death.
  12. 12. Liability of Retired Partner • Liability for acts done before his retirement • Liability for the acts done after his retirement. • 1. liability for acts done before his retirement- so long a person remains a partner in a firm, he remains bound by the acts of the firm. • Section 25- every partner is jointly and severally liable to the firm; section 18- partners is the agent of the firm for the purpose of the business of the firm. • Thus even after his retirement , a partner remains liable for the acts of he firm done before his retirement. But he may be discharged from his liability by contract between third parties and the partners of reconstituted firm.
  13. 13. 2.Liability for acts done after his retirement • A partner is not liable for acts of the firm done after his retirement. • Section 32(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.
  14. 14. Section 72 • A public notice under this Act is given— • (a) where it relates to the retirement of a partner from a registered firm, or to the dissolution of a registered firm, or to the election to become or not to become a partner in a registered firm by a person attaining majority who was admitted as a minor to the benefits of partnership, by notice to Registrar of Firms under section 63(Recording of changes and dissolution of firm), and by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relate has its place or principal place of business, and • (b) in any other case, by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates has its place or principal place of business.
  15. 15. Rights of outgoing Partner • Right of outgoing partner to carry on competing business • Section 11(2) : a partner shall not carry on any business other than that of the firm while he is a partner. • Section 16(b): if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business • Section 36(1)- An outgoing partner 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,— (a) use the firm name, • (b) represent himself as carrying on the business of the firm, or • (c) solicit the customers of persons who were dealing with the firm before he ceased to be a partner.
  16. 16. Agreement in restraint of trade • Sec 36(2) : A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within a specified local limits; and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
  17. 17. Right of outgoing partner in certain cases to share subsequent profits • Section 37: Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement 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 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 as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the property of the firm:
  18. 18. Continued.. • Provided that whereby contract between the partners 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 assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account for the same.
  19. 19. continued • Section 37 applies in the following cases- • Where a member of the firm has died or has ceased to be a partner and • The remaining partners carry on the business of the firm without any final settlement of accounts with the retiring partner or his estate.
  20. 20. Section 38 • A continuing guarantee to a firm, or to a third party in respect of the transaction 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 constitution of the firm

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