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Retirement of a partner

A partner is said to retire from the firm when he decides to leave the firm while the firm continues to exist. The partner who retires from an existing firm is known as a ‘retiring partner’ or an ‘outgoing partner’. The retiring partner must give a public notice of his retirement. Or else, he will remain a partner in the eyes of third parties and will be liable for the acts of the firm.
 
The partner may retire from the firm in any of the following mode:
  • He may retire with the consent of all the partners
  • The partners may enter into an express agreement about the retirement of a partner. In such a case, he may retire according to the terms of the agreement
  • In case of partnership at will, a partner may retire by giving a written notice of his retirement to all the other partners

Liability of a retiring partner for the acts done up to the date of retirement

  • A retiring partner continues to be liable to the third parties for the acts of the firm done before his retirement
  • He will also be liable for all transactions of the firm that had begun, but were unfinished at the time of his retirement
  • However, Sec. 32 (2) provides that a retired partner can be released from his liability to the creditor if the remaining partners, the retired partner and the creditors agree for the release of liability

Liability of a retiring partner for the acts done after retirement

  • A retiring partner is not liable for the acts of the firm done after his retirement, if a public notice of his retirement is given
  • A retiring partner continues to be liable to the third parties for the acts of the firm done even after his retirement until a public notice is given of his retirement. This is based on the principle of Holding Out
  • A public notice may be given either by the outgoing partner or any partner of the reconstituted firm
  • In the absence of a public notice, the firm will also be liable for the acts of the retired partner, if any, done by him as the partner of the firm
  • A sleeping partner will not be liable for the acts of the firm after his retirement even if a public notice is not given, since he is not known to the outsiders

Note: A retiring partner is not liable to any third party who deals with the firm without knowing that he was a partner, even if a public notice of his retirement is not given.

 
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Rights of a retired partner

  • To run a competing business
    • A retiring partner has a right to start any business after his retirement
    • He may start a new business which is competing with that of the firm
    • He may start such a business even next door to the constituted firm and can also advertise for the same
The above mentioned rights are subject to certain restrictions so that he may not damage the interest of the firm. Subject to a contract to contrary, the restrictions are as follows:
  • He should not use the name of the firm from which he has retired
  • He should not represent himself as a partner of the old firm
  • He should not solicit the customers who were dealing with the firm before he ceased to be a partner
  • To share subsequent profits: On retirement of a partner, it is the duty of the continuing partners to settle the accounts of the retiring partner, his share of property and profits in the firm. When a final settlement of account does not take place among the partners, the outgoing partner is entitled either
    • To share profits earned by the firm after his retirement or
    • To share interest at the rate of 6% p.a. on the amount of his share in the property of the firm




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