ISC Retirement of a Partner class 12

ISC Retirement of a Partner Class 12

Meaning of retirement of a partner:

When one or more partners leave the firm and the remaining partners continue to do the business of the firm, it is known as retirement of a partner.
Ajay, Vijay, and  Sanjay are partners in a firm. Due to some family problems, Ajay wants to leave the firm. The other partners(Vijay, and  Sanjay) decide to allow him to withdraw from the partnership, this is called retirement of a partner(Sanjay).  A partner has right to retire from the firm after giving due notice in advance.

The existing partner may decide to retire from the partnership for the following reasons –

1. Due to some family problem

2. Due to old age

3. Due to poor health

4. Due to strained relations

5. Partner has decided to live in another city

Due to retirement, the existing partnership comes to an end and the remaining partners form a new agreement and the partnership firm is reconstituted with new terms and conditions.

A partner retires either :

(i)With the consent of all the partners, or

(ii)As per the terms of the partnership agreement; or

(iii)By giving notice in writing to all other partners, if the partnership is at will.

ISC Retirement of a Partner class 12

Liabilities of a Retiring Partner:

  • A retiring partner is liable to third parties until he or the other members of the firm give public notice of his retirement. In case the third party was not aware that the retiring partner was a partner of the firm, he is not liable to the third party.

  • The retiring partner continues to be liable to the third parties for any acts of the firm for the period when he was a partner at the firm. He can be absolved from such liability if there is an agreement to the contrary between him, partners of the reconstituted firm and the concerned third party. Such an agreement can be expressed or implied by the conduct post the retirement announcement of the partner.

  • In case of a partnership at will, the retiring partner can be relieved by giving notice to other partners, informing them about his intention to retire. Public notice is not mandatory in this case. 

ISC Retirement of a Partner class 12

Rights of a Retiring Partner:

Section 36 of the Indian Partnership Act enumerates the rights of an outgoing or retiring partner.

According to this section, an outgoing partner may continue a business competing against that firm and may also advertise such business, but depending upon contract to the contrary, he may not:

  1. use the name of that firm,
  2. claim himself as a representative of the firm’s business, or
  3. solicit the firm’s customers, dealing with the firm, prior to his cessation as a partner of that firm.

Also, a retiring partner may form an agreement with other partners of the firm that he shall not carry on any business, similar to that of the firm’s business, within such specified time period or specified local limit, notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872 if reasonable restrictions are imposed.

In Churton v. Douglas, an English Court held that Section 36 contains what is now regarded as settled law in England on the subject of the sale of the goodwill of a partnership firm.

According to Section 37; during retirement, the retiring partner can reclaim his or her capital share contributed to the firm through the settlement of an account with the continuing partners.

This section further clarifies that if no such account settlement occurs during retirement of the partner, and the firm continues to use the retiree’s capital for the purpose of the firm’s business, then the retired partner shall be entitled to his claim even after his retirement, either:

  1. At the rate of 6% per annum at his share in the firm’s property, or
  2. Such share over the firm’s profits which are attributable to his capital share in the firm.

In M.C. Sharma v. B.C. Sharma & others; the High Court of Allahabad ruled that the benefit of the application of Section 37 of this Act is unavailable to a sole partner, desiring to continue a firm’s business post-dissolution.

ISC Retirement of a Partner class 12

The retiring partners claim:

The amount due to the retiring partner is paid according to the terms of the partnership
agreement. The retiring partners’ claim consists of
(a) The credit balance of Capital Account;
(b) His/her share in the Goodwill of the firm;
(c) His/her share in the Gain/Profit on Revaluation;
(d) His/her share in General Reserve and Accumulated Profit and
(f) Interest on Capital
But, the following deductions are made from the balance in his/her Capital Account
on account :
(a) His/her share in the Loss on Revaluation;
(b) His/her Drawings and Interest on Drawings up to the date of retirement;
(c) His/her share of any accumulated losses and
(d) Loan was taken from the firm.
The total amount so calculated is the claim of the retiring partner. He/she is interested
in receiving the amount at the earliest. Total payment may be made immediately after
his/her retirement.

However, the resources of the firm may not be adequate to make the payment to the retiring partner in lumpsum. The firm makes payment to retiring partner in instalments.

ISC Retirement of a Partner class 12

Adjustments Required on Retirement of a Partner:

Following accounting, treatments are done while retiring of a partner

1)Calculation of a new ratio and gaining ratio /sacrificing ratio (in some cases).

2) Accounting Treatment of goodwill ( Valuation and Adjustment).

3)Adjustment of revaluation of assets and reassessment of liabilities.

4)Adjustment of undistributed reserves and profits and losses a/c.

5)Capital adjustments and preparation of new balance sheet.

6)Calculation of the amount due to the retiring partner and the mode of payment.

Also read: Issue of debentures

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