RECONSTITUTION OF A FIRM

by • 24/06/2013 • GeneralComments (0)335

Q.9      Describes the rules Regarding Reconstitution of a firm.

Ans:    RECONSTITUTION OF A FIRM

The reconstitution of a firm takes place when there is any change in the composition of the partnership.

 

RECONSTITUTION OF A FIRM

 

1.         INTRODUCTION OF A PARTNER [SECTION 31]

Subject to provisions of Section 30 (regarding minor partner), a person may be admitted as a partner either.

(i)         With the consent of all the existing partner, or

(ii)        In according with a contract already entered into between the existing partners for the admission of a new partner.

EXAMPLE

The partnership agreement between X and Y provides that X could- introduce into partnership any of his sons on attaining the age of majority. X decides to admit his son (who has attained majority) as a partner. Y’s refused to consent; Y’s consent is not required since the clause in the partnership agreement operated as consent.

 

LIABILITY OF AN INCOMING PARTNER FOR FIRM’S ACTS DONE BEFORE HIS ADMISSION

An incoming partner is not liable for all the acts of the done before his admission. This general rules has two exceptions, which are as follows.

(i)         An incoming partner is liable for the acts done before his admission if

(a)        The new firm assumes the liabilities of the old firm, and.

(b)        The creditors accept the new firm as their debtor and discharge the old firm form its liability.

(ii)        A minor who, on attaining majority decides to become a partner, is liable for all acts of the firm done since he was admitted to the benefits of partnership.

LIABILITY OF AN INCOMING PARTNERSHIP FOR FIRM’S DONE AFTER HIS ADMISSION

An incoming partner is liable for all acts of the firm done after his admission.

2.         RETIREMENT OF A PARTNER [SECTION 32]

A partner may be retiring from the firm in any of the following ways.

(i)         With the consent of all the other partners; or

(ii)        In accordance with an express agreement among the partners; or

(iii)       In the case of partnership at will, by giving a notice to all other partner of his intention to retire.

 

LIABILITIES OF A RETIRING PARTNER

The liabilities of a retiring partner may be discussed as under.

(a)        For Firm’s acts before his retirement [Section 32(2)] He continuous to be liable to third party unless he is discharged for the same by a tripartite agreement between him, third party and the partners of the reconstituted firm.
(b)        For Firm’s acts after his retirement [Section 32(3), (4)] He continues to be liable to third party (other than one who deals with the firm without knowing that he was a partner) until public notice of his retirement is given either by himself or any of the other partners. This liability of a retiring partner is based on the principal of holding out.

 

RIGHT OF RETIRING PARTNER [SECTION 36 AND 37]

A retiring partner has the following two rights.

(a)        Right to carry competing business [Section 36]  He may carry on a business competing with that of the firm and may advertise such business but unless otherwise agreed he cannot. Use the firm’s name;Represent himself carrying on firm’s business; Solicit the old customers.
b)         Right in of a final settlement of accounts [Section 37] He at his option, is entitled to claim, either of the following. v Such share of profits earned after his retirement, which is attributable to the use of his share in the property. Interest at the rate of 6% p.a. on the amount of his share in the property.
Notes:   This right is available to a retaining partner even if only a part of his property is used in the business.This right is also available to the legal representatives of a deceased partner.

 

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3.         EXPULSION OP A PARTNER (SECTION 33]

A partner may be expelled if the following three conditions are satisfied.

(a)        The power to excel a partner must have existed in a contract between the partners.

(b)        The power must have been exercised by a majority of the partners, and

(c)        The power must have been exercised in goods faith without any private animosity.

(d)        The affected partner must be given an opportunity to make a representation before being dismissed.

The expulsion, without the satisfied of the aforesaid conditions, is said to be an irregular expulsion, which is null and void. The partner, who has been wrongly excelled, has a right to claim re-installment as a partner and not to recover damages for wrongful expulsion.

The rights and liabilities of an expelled partner are the same as those of a retired partner, [Section 33 (2)]

 

4.         INSOLVENCY OP A PARTNER [SECTION 34]

The effects resulting from the insolvency of partner are summarized below.

(a)        He ceases to be a partner on the date of the orders of adjudication;

(b)        Unless otherwise agreed, the firm is dissolved; [Section 42(d)]

(c)        His estate is not liable for firm’s acts done after the date of the order;

(d)        Firm is not liable for his acts done after the date of the order.

Note:    No public notice is required on the insolvency of a partner. [Section 45]

 

5.         DEATH OP A PARTNER [SECTION 35 AND 42]

Unless otherwise agreed by the partners, a firm is dissolved on the death of a partner [Section 42(c)J. Where under the contract of a firm is not dissolved by the death of a partner, the estate of-the deceased partner is not liable for any act of the firm done after the date of his death [Section 35]

Note:    No public notice is required on the death of a partner. [Section 45]

EXAMPLE

X was a partner in a firm. The firm ordered goods in X’s life but the delivery of the goods was made after X’s death. In such a case, X’s estate would not be liable for this debt because there was no debt due in respect of such goods in X’s life time.

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