Retirement of a Partner: Judicial interpretation
Authored By- Munis Nasir
Keywords- Capital Contribution, Mode of settlement, Indian Partnership Act, Retirement, Partner.
The Partnership Act 1932 governs partnerships in India. Reconstitution of a partnership firm occurs on various events such as admission of a new partner or retirement of a partner. A partner can retire at any time from a partnership firm and continue his business. Several rights are given to the retired partner as specified in Section 36 of the Indian Partnership Act 1932.
In India partnerships are governed by the Partnership Act 1932. Section 4 of the Indian Partnership Act, 1932 defines Partnership as relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Further, the organization formed between such persons of common understanding is called a partnership firm. Change in the structure of the firm is known as the reconstitution of the firm.
Section 31 of the Partnership Act 1932, states that a partner will be admitted to a partnership firm only with the prior consent of all partners or in accordance with the contract entered by the existing partners. Section 32 of the Partnership Act 1932, talks about the retirement of a partner. It states that any partner of a partnership firm may retire at any time for any reason such as bad health, etc. Further, it says that a partner can retire either with the prior consent of all the partners or in accordance with the terms and conditions of any agreement between the partners. Agreement which outlines the terms and conditions among the partners of a partnership is known as partnership deed. Similarly whether it is admission of a partner or retirement of a partner, it will eventually lead to a change in capital contribution and profit sharing ratios between the continuing partners.
Retirement of a Partner
According to the Section 32(1) of the Indian Partnership Act 1932, a partner of a partnership firm may retire:
1. With the consent of all the other partners of that partnership firm, or
2. In accordance with an expressed agreement in this regard by the other partners of the partnership firm, or
3. In case of partnership at will, by serving written notice to all other partners of the firm conveying his intention of retiring.
Section 36 of the Indian Partnership Act 1932, specifies the rights of an ongoing or retiring partner. It lists that an outgoing partner may pursue a different business or continue a business competing against that firm. But, depending on the terms and conditions of the contract of the firm which vary from firm to firm he cannot: use the name of that firm or claim himself as a representative of the firm’s business or solicit the firm’s customers, dealing with the firm, prior to his cessation as a partner of that firm. Further, a retiring partner may form an agreement with the other partners which states that he will not carry on any business within a certain time limit or period.
Section 37 of the Indian Partnership Act 1932, specifies that during retirement, the outgoing partner can regain his or her capital share contributed to the firm through the settlement with the other partners. There may be a possibility that the partners will not agree on a common term to recompense the capital share to the retired partner. In that case a partner has a right to claim his/her share even after retirement either at the rate of 6% per annum at his share in the firm’s property or share over the firm’s profits which are attributable to his capital share in the firm. Similarly Section 48 of the Indian Partnership Act 1932 deals with the mode of settlement between the partners at the time of dissolution of a partnership firm.
In the case of Gurunanak Industries Faridabad v. Amar Singh(D) Thru Lrs, the apex court held that there is a clear distinction between ‘retirement of a partner’ and ‘dissolution of a partnership firm’. On the event of the retirement of a partner, the reconstituted firm continues and further retiring partner is to be paid his dues as per section 37 of the Indian Partnership Act 1932. However, in the event of dissolution of a partnership firm, accounts need to be settled and cleared as per section 48 of the Partnership Act.
Further, the apex court on relying on what was held in the case of Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others specified that it is a case of dissolution and not retirement when the partners agree to dissolve a partnership. Moreover it was held that in the present case, where there were only two partners, the partnership firm could not have continued to carry on business as a firm. A partnership firm must have at least two partners. When there are only two partners and one has agreed to retire, then the retirement amounts to dissolution of the firm as held in Erach F.D. Mehta v. Minoo F.D. Mehta.
Moreover, there may arise a case where the partners of the firm formed a majority to expel a partner from the firm. Even in such cases the partner will be treated as the retired partner and will be subjected to the same rights and liabilities as a retired partner according to Section 33 of the Indian Partnership Act 1932.
Therefore, the courts are very much clear on the difference between ‘retirement of a partner’ and ‘dissolution of a firm’. Even in the case of expulsion of a partner through a majority passed against him by the partners will be considered as the retirement of that excluded partner.
 Civil Appeal No.s 6659-6660 of 2010  (2003) 3 SCC 445  (1970) 2 SCC 724