Right of outgoing partner in certain cases to share subsequent profits
Right of Outgoing Partner in Certain Cases to Share Subsequent Profits
(Section 37 of the Indian Partnership Act, 1932)
Legal Provision – Section 37, Indian Partnership Act, 1932
“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 with 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:
(a) 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
(b) Interest at the rate of 6% per annum on the amount of his share in the property of the firm.”
Key Points:
Applicability:
Applies when a partner retires, dies, or otherwise ceases to be a partner.
The remaining partners continue the business using the assets of the firm without settling accounts with the outgoing partner or their legal representatives.
Options Available to the Outgoing Partner (or Estate):
Option (a): Share in the profits that are attributable to the use of his share in the firm’s property.
Option (b): A fixed interest of 6% p.a. on his share in the firm’s property.
Condition: There must be no contract to the contrary. If a partnership agreement specifies otherwise, that will prevail.
Rationale: To prevent unjust enrichment by continuing partners who use the former partner’s share of the property without due settlement.
Illustration:
A, B, and C are partners in a firm. A retires without a final settlement. B and C continue the business using A's share in the firm’s property. A can claim:
Either a portion of profits attributable to the use of his share,
Or 6% interest on the value of his share—whichever he chooses.
Important Case Laws:
🧑⚖️ CIT v. A.W. Figgies & Co. [(1953) AIR SC 455]
Held that even after retirement, if a partner’s share in the firm is used without settlement, he is entitled to benefits under Section 37.
Confirmed that this right is statutory and exists in the absence of a contrary contract.
🧑⚖️ Narayanappa v. Bhaskara Krishnappa [(1966) AIR SC 1300]
Supreme Court ruled that outgoing partners retain rights in partnership property till final settlement is done.
Continuing partners cannot use such property without compensating the outgoing partner.
🧑⚖️ Erach F.D. Mehta v. Minoo F.D. Mehta [(2011) Bombay HC]
Reiterated the right of the outgoing partner to choose either profit share or 6% interest, not both.
Conclusion:
Section 37 protects an outgoing or deceased partner's estate by ensuring they are not unfairly deprived when the business is continued using their share of firm property. The law provides a statutory option to either share in subsequent profits or claim 6% interest, unless there is a specific agreement stating otherwise.
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