RIGHTS OF OUTGOING PARTNER
After a partner ceases to be a partner, the question of the following rights of the outgoing partner or his legal representatives generally arises:
1. Rights to carry on a competing business, and
2. Right to share subsequent profits until the amount due to him has been paid.
RIGHT TO CARRY ON A COMPETING BUSINESS
According to Section 36: Rights of outgoing partner to carry on competing business.—
1. An outgoing partner may carry on a business competing with that of the firm and he may advertise such business, but, subject to contract to the contrary, he may not—
a. use the firm name,
b. represent himself as carrying on the business of the firm, or
c. solicit the custom of persons who were dealing with the firm before he ceased to be a partner.
2. Agreements in restraint of trade.—
A partner may make an agreement with his partners that on ceasing to be a partner, he will not carry on any business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.)
This Section deals with the right of the outgoing partner with regard to some other business which he may like to carry on.
Sub-sec. (1) states that an outgoing partner, whether he leaves the firm by retirement, expulsion or insolvency, has a right to carry on a business competing with that of the firm. He may also advertise such business.
This right to carry on the competing business is, however, subject to three restrictions:
1. He cannot use the name of the firm for his business.
2. He cannot represent himself as carrying on the business of the firm and, therefore, he is not allowed to mislead the public by misrepresenting that he is still carrying on the firm's business.
3. He cannot solicit the customers or persons who were dealing with the firm. He cannot approach the old customers to persuade them to be diverted towards his business.
It should be noted above that he can advertise his own business and if the old customers of themselves prefer to come to him, there is no bar to his attending to them.
The restrictions are similar to those which are imposed on a person who sells the goodwill of his business.
When a partner leaves the firm, he gets his share of the assets. Such share generally includes payment for his share of the goodwill also.
Outgoing partner is presumed to have sold the goodwill to the remaining partners and, therefore, restrictions as stated above are applicable to him.
These restrictions are subject to contract between the outgoing and the other partners.
RESTRICTION ON COMPETING BUSINESS
It has been noted that ordinarily 'an outgoing partner may carry on a business competing with that of the firm and he may advertise such business' although subject to certain restrictions which have been discussed above.
The remaining partners may sometimes like to have greater protection of their interest rather than merely imposition of the abovesaid restrictions on the outgoing partner.
In view of this position, Section 36(2) permits an agreement being made between the outgoing partner and the continuing partners whereby the outgoing partner be restrained from carrying on business similar to that of the firm.
Such an agreement has been declared to be valid and constitutes an exception to the rule contained in Sec. 27, Indian Contract Act which declares an agreement in restraint of trade as void. It is, however, necessary that:
1. the agreement restraining the outgoing partner from carrying on a similar business should stipulate that such a business will not be carried on for a specified period or within specified local limits, and
2. the restriction imposed should be reasonable.
RIGHT TO SHARE SUBSEQUENT PROFITS
(When a partner ceases to be a partner by retirement, expulsion, insolvency or death, his share in the property of the firm may not be immediately paid to him and) ( the firm may continue the business without any final settlement of accounts between the outgoing partner or his estate and the others.
Section 37 gives an option to the outgoing partner or the representative of the deceased partner, who has not been paid his share of the property, either:
to claim such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm, or
to claim an interest at the rate of 6% per annum on the amount of his share in the property of the firm.
Where a partner has retired from the firm after selling his share in the partnership firm and the firm is reconstituted with new partners, the share of the retired partner is to be valued as on the date of his retirement.
P.V.V. BEDDY V. C.C. REDDY
In above case, the plaintiff had retired from the firm on 5-4-1971 after selling his share in the partnership firm.
The High Court directed the appointment of inquiry into valuation of his share.
It was held that the share of the retired partner was to be valued as on the date he retired and not on the date the report of the Commissioner submitted after enquiry as to the valuation of his share of retired partner, particularly when the firm was reconstituted with new partners.
K.S. RAO V. VENKATESWARLU
In above case, one of the partners left the firm and the firm was reconstituted with the remaining partners.
The share of the outgoing partner continued to be utilised by the reconstituted firm.
The earlier partnership deed had provided that a partner would get 12% interest on the capital brought in by him.
The outgoing partner claimed interest of 12% on his share remaining in the business after he left the firm.
It was held that on such sum remaining in partnership firm, the outgoing partner could claim interest of 6% p.a. as stated in Section 37 and not any higher interest.
The only other option available to an outgoing partner is to claim such share of profits as may be attributed to the use of his share of the property of the firm.
This is subject to the contract between the partners to the contrary.
