A Limited Liability Partnership is run by its partners. From its management to the operation, the partners direct the LLP towards its goals and vision. New partners are added or existing leave; it does not affect the status of the LLP, but surely impacts the growth of the business and responsibilities of other partners. The change in partners and their details can be affected only after the approval from the Ministry of Corporate Affairs.
To add or remove a partner from LLP, the consent of other partners must be obtained, which is followed by a change in the LLP Agreement and application to MCA to approve the changes. The application to MCA must be filed within 30 days of effective date of the change.
Why is the change of partners required?
Section 31: Introduction of a new partner
The liabilities of a new partner in a partnership firm generally commences from the date when the individual is admitted as a partner unless he agrees to be liable for obligations incurred by the firm before the date. The new firm, including the newly introduced partner who joins it, may agree to assume liability for the firm’s existing debts, and creditors may decide to accept the new firm as their debtor and discharge the old partners. The consent of the creditor is necessary in every case to make the transaction operative. Novation is the technical term in a contract for substituted liability, of course, not confined only to the case of a partnership. But a simple agreement among the partners cannot operate as Novation. Thus, an agreement between the partners of the firm and the incoming partner stating that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him. In the case of a partnership between two partners, this section does not apply as the partnership automatically dissolved by the death of one of them. In this event, there is no partnership at all for any new partner to be introduced into it without the consent of other.
Section 32: Retirement of a partner
An existing partner of a partnership firm may retire while fulfilling the following conditions.
- Obtain the consent of all the other partners of the firm.
- By an express agreement among the partners.
- By submitting a notice in writing to all the partners regarding the intention to retire if the partnership is formed at will.
However, such a partner shall continue to be liable to the third party for the acts of the firm after his retirement unless public notice of the withdrawal has been published by himself or by the other existing partners. Although, as stated in Sub-sections (3) and (4), the retired partner will not be liable to any third parties if the latter deals with the firm without knowing that the former was a partner.
Rights of the outgoing partner
Section 36: Right to conduct a competing business
An outgoing partner may carry on a company that competes with that of the firm. The partner may advertise such activity, but subject to contract to the contrary, the partner, cannot use the name of the firm or represent himself as carrying on the business of the firm. This includes soliciting customers of the firm that he has left as stated in Section 36(1). Although this provision has imposed a few restrictions on an outgoing partner, it effectively allows him to carry on a business activity competing with that of the firm. However, the partner may agree with his partners that on his ceasing to be so, he will not carry on a business activity similar to that of the firm within a specified period or prescribed local limits. Such an agreement will not be restraint of trade if the limitation is reasonable as stated in Section 36(2).
Right to Shares
When a partner retires, he has the right to obtain or receive his share of the firm’s property that includes goodwill. The assets or the properties should be taken at their fair value to the partnership firm at the date of the account and not at a value as appearing in the partnership if it has been held that in the absence of evidence of any uniform usage to the contrary.
Section 37: Entitled to claim
If the continuing partners carry on the business of the firm with the property of the firm without a final settlement of accounts with the exiting partner, then the outgoing partner is entitled to claim from the firm. The partner may claim from the firm such share in the profits made by the firm, as he ceased to be a partner, as attributable to the use of share of the property of the firm. Another option for the partner is to claim interest at 6 per cent per annum rate on the amount of the partner’s share in the firm’s property. However, if through a contract between the partners, and has been provided to the continuing partners, to purchase the interest belonging to the outgoing partner, the outgoing partner or his estate will not be entitled to any further share of the profits if the option is duly exercised. On the other hand, a partner who assumes to act in exercise of the option does not in all material respect comply with the terms thereof; then the partner would be liable to account under the provisions under the Section.
Section 34: Insolvency of a partner
When a partner of a partnership firm is adjudicated an insolvent, the partner ceases to be a partner on the date of the order of adjudication regardless if the firm is dissolved or not. The partner’s estate ceases to be liable for any action of the firm taken after the date of the order, and the firm is also not responsible for action taken by the partner after the said date.
Effects of Insolvency
The effects of Insolvency have been listed below.
- The partner cannot continue as one in the firm after being insolvent.
- The partner ceases to be a partner from the date on which the order of adjudication is made.
- The estate of the insolvent partner shall not be liable for the actions of the firm taken after the date of the order of adjudication.
- The firm is similarly not liable for any action taken by the insolvent partner after the date of the order of adjudication.
- Generally but not invariably, the partner’s insolvency often results in the dissolution of the firm. However, the partners are competent to agree among themselves that adjudication of a partner as an insolvent will not give rise to a dissolution of the firm.
Section 33: Expulsion of a partner
There are various reason why a partner may be expelled from a partnership firm. A partner of a firm may not be dismissed from a partnership firm by a majority of the partner except in exercise, in good faith, of powers conferred by contract between the partners. An expulsion is not deemed to be in a proper interest of the business of the firm if the conditions below are not fulfilled.
- The power of expulsion must be stated in a contract between the partners.
- A majority of the partners must exercise the power.
- It has to be exercised in good faith.
The test of good faith as required for expulsion as stated under Section 33(1) includes three aspects.
- The expulsion must be in the best interest of the partnership.
- The partner that is to be expelled must be served with a notice.
- The partner has to be given the opportunity of being heard.
If a partner is expelled without fulfilling these conditions, the expulsion is considered null and void. The only solution, when a partner is involved in misconduct in the business of the firm, is to seek judicial dissolution. It should be noted that the expulsion of partners does not always result in the dissolution of the firm. An invalid expulsion of a partner does not bring the partnership to an end even if the partnership is at will and it will be deemed to continue as before.
FAQs
Continuing Guarantee Revocation?
A continuing guarantee is given to a firm or a third party in concern of a transaction of a firm is revoked as to future transactions from the date of any amendments made in the constitution of the firm. This provision is given in Section 38 of the Indian Partnership Act in the absence of an agreement to the contrary. It should be noted that this rule is subject to an agreement to the contrary. The agreement, if any made, to the contrary required to displace the effect of Section 38, must be stated clearly and should be precise.
Death of a partner?
In a case where under a contract that the death of a partner does not dissolve a firm, the estates of the deceased partner are not liable for any act of the firm after his death. Generally, the effect of the death of a partner would result in the dissolution of the partnership. Although the rule in concern to the dissolution of the partnership due to death of a partner is subject to a contract between the parties and the partners are competent to agree that the death of a partner will not have the effect of dissolving the partnership. This is applicable unless the firm consists of just two partners. It is not essential to give any notice either to the public or the individuals who have dealt with the firm about the estate of the deceased partner may be absolved from liability from future obligations of the firm.