Here is a small note on the legal steps to be taken when a partner retires from partnership, to have safe exit. What steps are to be taken by the firm, so that firm is escaped from future acts and wrong doings of the retired partner.
Following the appropriate procedure laid down in Partnership Act is highly important because firm could be sued for the acts of retired partner. The retired partner can be sued for the wrong-doing of the firm as well.
A firm, unlike a company is not separate entity in the eye of law. A Partnership is an association of people, a partner is an agent of the firm and a partner can represent all other partner and bind them. Hence, any act of the partner will be considered as the act on behalf of the firm and vice-versa. As per partnership law, a partner is entitled to share profit and loss of the firm. This being a legal status of the partner and the firm, it is important to announce to the public at large when partner is retiring from a partnership.
In the absence of a public notice of retirement, a third party can make claim against the firm for the acts of the retired partner, in similar way, third parties can sue the partner even for the act done by the firm. Section 32 of the Partnership Act describe the procedure to follow on retirement.
Section 32: Retirement of a partner.
(1) A partner may retire-
(a) with the consent of all the other 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 partner.
(4) Notices under sub- section (3) may be given by the retired partner or by any partner of the reconstituted firm.
The above section makes it abundantly clear that a public notice is to be given regarding retirement otherwise the retiring partner will be liable for the acts of the firm.
Hence it is important to know, how public notice is given. The same is discussed in Section 72. Of the Partnership Act
Section 72 of Partnership Act is reproduced below;
72. 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, 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.
From these two sections it is very clear that if a retiring partner fails to issue a public notice in any vernacular newspaper as well as in public gazette, he is liable to the acts of the firm and vice-versa.
Incase, the firm is a registered partnership, then the retiring partner/ firm should ensure that the entries in the Register of Firms are amended reflecting the retirement of the person concerned.
Partnership is an important legal structure, popularly followed as preferred choice of entity for all small and medium sized enterprises. However, partners of a firm while retiring from the partnership, ignore the above legal prescriptions and fail to give public notice. This has resulted in many legal disputes and financial liabilities impacting the partner/ or the firm, for the acts not done by him or authorized by him and vice versa.
Rajesh Vellakkat and Prathap.K