Outgoing Partners in India
Outgoing Partners in India
1. Definition
An Outgoing Partner is a partner who has ceased to be a partner in a firm. This can happen by way of:
Retirement
Expulsion
Dissolution of the firm
Death (in which case, usually, the estate is involved)
Expiry of the partnership term
2. Legal Position of Outgoing Partners
Once a partner ceases to be a partner, their rights and liabilities change, but some responsibilities may continue under certain conditions.
3. Rights of Outgoing Partners
Right to Share of Assets: The outgoing partner is entitled to receive their share of the assets or capital contribution, along with any profit or loss in the firm up to the date of cessation.
Right to Accounts: The outgoing partner can demand an account of the firm’s affairs up to the date of leaving.
Right to Indemnity: If the outgoing partner has paid any firm debts after their exit, they can claim indemnity from continuing partners.
4. Liabilities of Outgoing Partners
Liability for Acts Done Before Cessation: The outgoing partner remains liable for all acts of the firm done before their exit.
Liability for Acts Done After Cessation: The outgoing partner is not liable for acts of the firm done after their retirement or cessation, except where third parties are not aware of the change.
Liability to Third Parties: If the change in partnership is not properly communicated to third parties, the outgoing partner may still be held liable for acts done by the firm in the ordinary course of business.
5. Notice to Third Parties
The firm or continuing partners must give public notice (e.g., in newspapers, Registrar of Firms) to ensure that third parties are aware that the partner has left.
Failure to give notice means the outgoing partner may be held liable for transactions entered into by the firm.
6. Key Case Law
1. Harnam Singh & Sons Ltd. v. Union of India (1967)
The court observed that an outgoing partner is liable for the firm’s debts incurred before the date of retirement or dissolution.
However, the partner ceases to be liable for new contracts entered into after their retirement, provided proper notice has been given.
2. Deolal v. The Union of India (1962)
The court held that an outgoing partner must be relieved of liability only after proper notice has been given to creditors and third parties.
Until such notice, the outgoing partner continues to be liable for the acts of the firm.
3. Punjab National Bank v. Das (1955)
Affirmed the principle that an outgoing partner’s liability continues unless third parties are given notice.
The outgoing partner can be held liable for debts incurred after cessation if the firm represents that they are still partners.
7. Summary of Legal Principles
| Aspect | Position |
|---|---|
| Rights of Outgoing Partner | Share in assets, account of firm, indemnity rights. |
| Liability for Pre-Exit Acts | Outgoing partner remains liable. |
| Liability for Post-Exit Acts | No liability if third parties are notified; otherwise liable. |
| Notice Requirement | Must notify third parties to relieve outgoing partner of liability. |
| Recovery Rights | Can sue continuing partners for indemnity if paying debts post-exit. |
8. Practical Importance
Outgoing partners must ensure proper documentation of retirement or exit.
The firm must take steps to notify all concerned parties to avoid future liabilities.
Proper settlement of accounts is crucial to avoid disputes.
9. Conclusion
The concept of an outgoing partner balances protection of third parties with the rights of the retiring or exiting partner. The law ensures that an outgoing partner is not unjustly burdened with liabilities incurred after their exit but also safeguards creditors and third parties by requiring proper notice.
RELATED Blog
0 comments