A partner is retiring: who stays liable, and what public notice you must give
A partner leaving a partnership firm stays liable to outsiders until public notice is given. What the Partnership Act says and the steps to close that gap.
CA Harun Raaj
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You run a partnership firm. One partner wants out.
Everyone assumes the matter ends the day the retiring partner says "I am leaving". It does not. Between the partners, the retirement can be complete that day. Towards banks, suppliers, landlords and customers, it is not complete until the law says so.
This article walks through what the Indian Partnership Act, 1932 says about a retiring partner's liability, what "public notice" means, and the steps that close the gap.
The situation: you are leaving, or your partner is
A partnership firm is run by its partners. Each partner is the agent of the firm for the purpose of its business (s.18, Indian Partnership Act 1932). And every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner (s.25, Indian Partnership Act 1932).
In plain words: a creditor can claim the whole amount from the partners together, or from any one of them alone.
So when one partner retires, three questions come up:
- Is the retirement valid?
- What happens to the debts and contracts of the firm from before the retirement?
- What happens to dealings that take place after the retirement?
The Act answers each one. The answers are not the same, and the third is where people get caught.
How a partner may retire
A partner may retire in one of three ways (s.32(1), Indian Partnership Act 1932):
- with the consent of all the other partners;
- in accordance with an express agreement by the partners, for example a clause in the partnership deed that lets a partner leave on a stated notice; or
- where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.
A partnership is "at will" where the partners made no provision for how long it lasts or how it ends (s.7, Indian Partnership Act 1932). If yours is, a written notice to every other partner is enough. Keep proof that each partner received it.
What happens to the old debts
Retirement does not wipe out what the firm already owes. A retiring partner remains liable to a third party for acts of the firm done before retirement, unless that third party agrees to release him.
The Act allows this release. A retiring partner may be discharged from any liability to a third party for acts of the firm done before his retirement by an agreement made by him with that third party and the partners of the reconstituted firm (s.32(2), Indian Partnership Act 1932). "Reconstituted firm" means the firm as it stands after the partner has left.
Two points follow.
First, the release needs the creditor's agreement. The other partners saying "we will pay it" is not enough against the creditor. It only gives the retiring partner a claim on his old partners if they later fail to pay.
Second, the agreement may be implied. The Act says it may be implied by a course of dealing between the third party and the reconstituted firm after he had knowledge of the retirement (s.32(2), Indian Partnership Act 1932). For example, a supplier knows the partner has left, and carries on supplying the continuing partners and accepting their payments. That can amount to a release. Ask big creditors, such as the bank, for a written release.
What happens to new dealings: the public notice rule
This is the rule that catches people. Even after retirement, 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 (s.32(3), Indian Partnership Act 1932).
In plain words: until public notice is given, an outsider can still treat the retired partner as a partner. If the continuing partners sign a new contract or take new credit in the firm's name, the retired partner can be pulled in.
There is a protection. A retired partner is not liable to any third party who deals with the firm without knowing that he was a partner (s.32(3), proviso, Indian Partnership Act 1932). So a customer who never knew you were in the firm cannot claim against you after you leave. A bank, a regular supplier or a landlord who dealt with you as a partner is a different matter.
Who can give the notice? Notices under s.32(3) may be given by the retired partner or by any partner of the reconstituted firm (s.32(4), Indian Partnership Act 1932). If you are the one leaving, do not wait for your old partners to do it. You can give it yourself.
What counts as "public notice"
The Act defines how public notice is given (s.72, Indian Partnership Act 1932). It depends on whether the firm is registered.
If the firm is registered. Where the notice relates to the retirement of a partner from a registered firm, public notice is given 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 has its place or principal place of business (s.72(a), Indian Partnership Act 1932). That is three things: the Registrar, the Gazette and a local-language newspaper.
If the firm is not registered. In any other case, public notice is given by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business (s.72(b), Indian Partnership Act 1932). No Registrar step is part of public notice for an unregistered firm.
The deadline clock
The text of the Act does not set a number of days for giving public notice of a retirement. The risk is not a penalty date. The risk is that the liability in s.32(3) keeps running every day until public notice is given. Each new contract the continuing partners sign in the firm's name is a fresh exposure for the person who has left.
So the practical deadline is "as soon as the retirement takes effect". Fix the retirement date in writing, and publish the notice straight after it.
For the filing with the Registrar, the Act does not give a time limit in the sections read for this article. The form and the fee are "prescribed", which means set by rules of the State Government (s.71, Indian Partnership Act 1932). Check the current form, fee and any time limit with your state's Registrar of Firms before you file.
Step by step
Step 1. Settle the retirement in writing. Record the retirement date and the route used under s.32(1). Use a retirement deed or a written notice to every other partner if the firm is at will. State who takes over the retiring partner's share, and how the amount due to him will be paid.
Step 2. Settle the money between partners. If the continuing partners carry on the business with the firm's property without a final settlement of accounts, the outgoing partner may, absent a contrary contract, claim a share of the profits attributable to his share of the property, or interest at six per cent per annum on that share (s.37, Indian Partnership Act 1932). Settle this in the deed.
Step 3. Ask key creditors for a release. Write to the bank, major suppliers and the landlord. Ask each to confirm in writing that the retiring partner is discharged for the firm's past acts (s.32(2), Indian Partnership Act 1932). Note that a continuing guarantee given to a firm, or to a third party for the firm's transactions, is, unless agreed otherwise, revoked as to future transactions from the date of any change in the constitution of the firm (s.38, Indian Partnership Act 1932). If the retiring partner guaranteed a loan, talk to the lender at once.
Step 4. Give notice to the Registrar (registered firms). Any incoming, continuing or outgoing partner may give notice to the Registrar of the change, specifying the date of it. The Registrar records the notice in the entry for the firm in the Register of Firms and files it with the firm's original statement (s.63(1), Indian Partnership Act 1932). Use the form and pay the fee your state prescribes. The person signing must be careful: signing a notice with a particular he knows to be false, or incomplete, is punishable with imprisonment up to three months, or fine, or both (s.70, Indian Partnership Act 1932).
Step 5. Publish in the Official Gazette and a local newspaper. Do this for both registered and unregistered firms (s.72, Indian Partnership Act 1932). Keep the Gazette copy and the cutting as proof.
What not to do
- Do not assume a private letter is public notice. A letter to a few clients is not what s.72 describes.
- Do not skip the Registrar if the firm is registered. The Gazette and newspaper alone are not the full public notice for a registered firm (s.72(a), Indian Partnership Act 1932).
- Do not keep using the firm name after leaving. Subject to contract to the contrary, an outgoing partner may not use the firm name, represent himself as carrying on the firm's business, or solicit people who dealt with the firm before he left (s.36(1), Indian Partnership Act 1932).
- Do not confuse retirement with dissolution. If all partners go, or the firm ends, the rules for dissolution apply instead, and public notice of dissolution is needed too (s.45, Indian Partnership Act 1932).
What to do now
- Next step: Fix the retirement date in writing, and give public notice straight away. For a registered firm, that means notice to the Registrar of Firms and publication in the Official Gazette and a local-language newspaper (s.63(1) and s.72(a), Indian Partnership Act 1932). For an unregistered firm, Gazette and newspaper only (s.72(b), Indian Partnership Act 1932).
- Deadline: The sections of the Act read here set no number of days. The liability runs until notice is given (s.32(3), Indian Partnership Act 1932). Check the current Registrar form, fee and time limit for your state before you file.
- Consequence of not acting: The retired partner, and the continuing partners, remain liable as partners to third parties for acts of the firm, until public notice is given (s.32(3), Indian Partnership Act 1932). The one exception is a third party who dealt with the firm without knowing he was a partner.
Have a CA review your facts before you act or file.
Frequently asked questions
Does a retiring partner stop being liable the day he retires?
No. For dealings after the retirement, he stays liable as a partner to outsiders until public notice is given (s.32(3), Indian Partnership Act 1932). For debts from before the retirement, he stays liable unless the creditor agrees to release him (s.32(2), Indian Partnership Act 1932).
Can a retiring partner give the public notice himself?
Yes. Notices under s.32(3) may be given by the retired partner or by any partner of the reconstituted firm (s.32(4), Indian Partnership Act 1932).
Do I need to tell the Registrar if my firm is not registered?
No. For an unregistered firm, public notice is given by publication in the Official Gazette and at least one vernacular newspaper in the district of the firm's place or principal place of business (s.72(b), Indian Partnership Act 1932).
A customer never knew I was a partner. Can they still claim against me?
The Act protects a retired partner against a third party who deals with the firm without knowing that he was a partner (s.32(3), proviso, Indian Partnership Act 1932). Whether a given customer knew is a question of fact, so keep your evidence.
Can a partner retire if the partnership deed is silent?
If the partnership is at will, he may retire by written notice to all the other partners. If it is for a fixed term, he needs the consent of all the other partners or an express agreement allowing it (s.32(1), Indian Partnership Act 1932).
Can the retired partner start a competing business?
He may carry on a competing business and advertise it. But subject to contract to the contrary, he may not use the firm name, say he carries on the firm's business, or solicit the firm's earlier customers (s.36(1), Indian Partnership Act 1932).
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