‘Outgoing partner’ is the partner who is leaving the partnership firm. When the partner leaves the firm either due to the retirement or due to the death, it is called as the outgoing partner. Outgoing partner is a partner who is going to leave a particular firm purposely or to he/she might be died or expelled by a firm.

Section 4 of the Partnership Act of India, of 1932 defines “Partnership” as “a relationship between individuals who agree to share the business interests of one or all of them, present on behalf of all”. And in the same way, it defines a Partner, as who enters into such a partnership with another person. In other words, general partners are people who work collectively for a common business to share profits. Now, it’s important to note what a Partnership Deed is. It is a tool that formalizes the agreed terms of a partnership by partners. It can be written or spoken, but in any case, creates a legal agreement. In this case we shall retirement of partner in a partnership firm.

Ss 32 to 38 deal with different ways in which a partner may cease to be a partner and his rights and liabilities thereafter. These provisions pertain to situations when the outgoing partner ceases to be a partner, but the firm is not dissolved and it continues with the remaining partners. A partner may cease to be a partner in the following ways:

• Retirement of a Partner (Section 32)
• Removal or Expulsion of a Partner (Section 33)
• Bankruptcy or Insolvency of a Partner (Section 34)
• Liability or Debt of deceased Partner (Section 35)

Retirement of partner:

Use of the word “retire” in s 32 of the Partnership Act, 1932 is confined to cases where a partner withdraws from a firm and the remaining partners continue to carry on the business of the firm without dissolution of partnership as between them. Where a partner withdraws from a firm by dissolving it, it shall be dissolution and not retirement. Retirement of a partner from a firm does not dissolve it.

Section32

Retirement of a Partner:

(1) A partner may retire –

(a) with the consent of all the otter partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

(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 party.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm.

How Can a Partner Retire?

 According to section 32(1), a partner may retire

a) With the Consent of All the Other Partners:

The partnership business depends upon the continued support from all the partners and as a general rule, no partner can retire whenever he likes. The retirement of a partner might mean a serious problem of a whole business. A partner can, therefore, retire with the consent of all the other partners. Such consent may be express or implied.

b) In Accordance with Express Agreement by the Partners:

In case the agreement between the partners themselves condones the requirement of the consent of them all. A partner may retire accordingly. For instance, the partnership deed provides that a partner may retire with the consent of the majority of other partners or by giving one year’s notice, a partner can retire in accordance with such an agreement.

c) In Partnership at Will by a Notice to Others:

In case of partnership at will, a partner may retire by giving a notice in writing to all the other partners of his intention to retire. In a partnership at will, a partner has also a right to get the firm dissolved by giving a notice in writing to all other partners of his intention to dissolve the firm.

The need for such a notice arises when all other partners either do not agree to the retirement of a partner or they are not readily available to give their consent for the retirement of a partner. In case of partnership at will, a partner could also retire either under s 32 (1) (a) with the consent of all the other partners or under s 32 (1) (b) in accordance with an express agreement by the partners.

In Farrar V Defline 1 Car & K. 580 case, the Court observed that according to Section 32 (1), a partner may retire with the consent of all the other partners or with an agreement amongst the partners but if the partnership is at will, this shall be only after giving a notice in writing. A notice is however not necessary for a dormant partner until and unless the partner is known as a member of the firm to the creditors.

Liability of Retiring Partner:

Every partner is liable for all acts of the firm done while he is a partner. If liability has arisen during the period while a person was a partner, such liability does not come to an end by his retirement. According to s 32 (2), however, there is a possibility of discharge of the outgoing partner from liability for the past acts.

The above-mentioned procedure for discharge of a retiring partner from liability is by way of novation. Novation means substitution, with the creditor’s consent, of a new debtor for an old one. This is done by substituting a new contract in place of an old one, thereby discharging the liability of the original debtor and creating that of a new one in his place. It is essential that the creditor must agree to such a substitution. For example, X has a right of action against the partners A, B & C. A retires and then X agrees to make only B & C liable. A is thereby discharged from his liability. In partnership when the creditor accepts the security of continuing partners in discharge of that of the former partners, the outgoing partner is thereby discharged from his liability towards such creditor.

Sub-sec (2) to s 32 requires that for the proper discharge of the retiring partner from liability, there should be a contract between all the three parties viz., the outgoing partner, the members of the reconstituted firm and the creditor. Mere agreement between the outgoing and the continuing partners that only the continuing partners will be liable for all the past acts does not discharge the outgoing partner from his liability towards the creditor. The concurrence of the creditor also must be there to such a contract. Such an agreement need not always be express, it may be implied by a course of dealing between such third party (creditor) and the reconstituted firm after he had knowledge of the retirement.

In Maurice v. Morley 29 C.W.N. 496 case, the Court held that if liability has arisen during the period while a person was a partner, such liability does not come to an end by his retirement, he shall be liable for the debts contracted before his retirement.

In Evans v Drummond 4 Esp. case, where A and B, the two partners in a firm executed a bill in favour of a creditor X. A retired and thereafter on the due date the bill was not paid to X but a new bill signed only 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 the continuing partner, the creditor had relied on his sole security, and had discharged the retiring partner from liability.

In K.J. George v State Bank of Travancore, AIR 2002 Ker 214 case, where, the respondent bank granted overdraft facility and medium-term loan to a partnership firm which included defendant as the partner. While the amount still remained unpaid to the bank, the defendant retired from the partnership firm on 10th March 1983. The notice of the retirement of the partner was duly sent to the said bank. Thereafter revival letters in respect of the loan and a subsequent agreement was entered into between the bank and those partners who continued the business. The retiring partner was not a party to the revival agreement entered by the bank with the firm after his retirement. Moreover, the entire liability towards the bank was taken over by the continuing partners. The bank also never required the defendant, i.e., the retiring partner to sign the revival agreement. The Court held that the bank had accepted that the partners of the reconstituted firm alone will be liable for the debts of the firm. The retiring partner was, therefore, discharged from his liability towards the respondent bank.

Further as per Section 32 (3) & (4), by retirement a person ceases to be a partner. The third parties can still presume mutual agency between the outgoing and the continuing partners until a public notice of retirement is given. However, if the public notice is not issued, the partners continue to be liable. In order to avoid such liability, it is in the interests of both the retiring and the continuing partners that public notice is given.

Public Notice:

Section72:

Mode of Giving Public Notice:

A public notice under this Act is given

(a) Where it relates to the retirement or expulsion 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 the Registrar of Firms under section 63, and 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, and

(b) in any other case, 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.

According to s 72, a public notice means a notice in the Official Gazette, 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, and if the firm is registered, to the Registrar of Firms concerned. Therefore, merely publication of the notice in a local newspaper is not sufficient, and such a notice does not absolve the outgoing partner from liability towards a third person.

The liability stated above which arises in the absence of public notice is nothing but the application of the doctrine of holding out. There is a presumption that a person who was known to be a partner continues to be so known to the third parties until the notice of retirement is given.

In Scarf v Jardine, (1882) 7 AC 345 case, the Court said “The principle of law, which is stated in Lindley on Partnership is inconvertible, namely, that „when an ostensible partner retires, or when a partnership between several known partners is dissolved, those who dealt with the firm before a change took place are entitled to assume, until they have notice to the contrary, that no change has occurred; and the principle on which they are entitled to assume is that of the estoppel of a person who has accredited another as his known agent from denying that agency at a subsequent time as against the person to whom he has accredited him, by reason of any secret revocation.‟ Of course, in partnership, there is an agency. One partner is agent of another; and in the case of those who under the direction of the partners for the time being carry on the business according to the ordinary course, where a man has established such an agency, and has held it out to others, they have a right to assume that it continues until they have notice to the contrary.”

Rights of Retiring Partner:

Section 36:

Right of Outgoing Partner to Carry on Competing Business:

(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 custom of persons who were dealing with the firm before he ceased to be a partner.

(2) Agreements in Restraint of Trade:

 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.

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.

This section deals with the right of the outgoing partner with regard to some other business which he may like to carry on. Sub-sec (1) states that an outgoing partner, whether he leaves the firm by retirement, expulsion or insolvency, has a right to carry on a business competing with that of the firm. He may also advertise such business. This right to carry on the competing business is, however, subject to three restrictions:

• He cannot use the name of the firm for his business.
• He cannot represent himself as carrying on the business of the firm and, therefore, he is not allowed to mislead the public by misrepresenting that he is still carrying on the firm‟s business.
• He cannot solicit the customers or persons who were dealing with the firm. He cannot approach the old customers to persuade them to be diverted towards his business. It has been noted that he can advertise his own business and if the old customers of themselves prefer to come to him, there is no bar to his attending to them

The above-stated restrictions on the outgoing partner are necessary to protect the interest of the firm which he leaves. The restrictions are similar to those which are imposed on a person who sells the goodwill of his business. When a partner leaves the firm, he gets his share of the assets. Such share generally includes payment for his share of the goodwill also. Outgoing partner is presumed to have sold the goodwill to the remaining partners and, therefore, restrictions as stated above are applicable to him. These restrictions are subject to contract between the outgoing and the other partners.

Section37:

Right of Outgoing Partner in Certain Cases to Share Subsequent Profits:

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 :

Provided that where by 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 of 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 under the foregoing provisions of this section.

If a member of the firm dies or otherwise ceases to be a partner of the firm, and the remaining partners carry on the business without any final settlement of accounts between them and the outgoing partner, then the outgoing partner or his estate is entitled to share of the profits made by the firm since he ceased to be a partner.