There is a partnership firm made up of four partners. They are engaged in some petty manufacturing work. They have lands and other assest in the name of the firm.
They are doing business. This partnership has been constituted in the era of pre-1991-reforms India. This firm earns few profit here and there. The business of manufacturing is barely good enough as per domestic standards let along world class foreign firms. The only thing that is keeping a business like this from going under is the protectionist shield provided by the socialist policies of the State.
After a while, two partners resigned from the firm, and therefore a fresh partnership deed had to be drawn and executed between the remaining partners. And the partnership–now between two partners–continued to engage in the business.
So, even after two partners resigned from the erstwhile partnership firm comprising of four partners, the reconstituted firm continues to exist, and the retiring partners are to be paid their dues in terms of Section 37 of the Partnership Act.
37. Right of outgoing partner in certain cases to share subsequent profits.—Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to 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 interest at the rate of six per cent per annum on the amount of his share in the property of the firm: Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.
Partnership Act, 1932
If all the partners had thought that doing business is very tough and they are better off doing something else in their individual capacity then they would have gone for dissolution of the firm. In case of the dissolution of the firm, the account would have to be settled between the partners and distributed as per section 48 of the Partnership Act.
48. Mode of settlement of accounts between partners.—In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed: (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. (b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order—(i) in paying the debts of the firm to third parties; (ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; (iii) in paying to each partner rateably what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.
Partnership Act, 1932
Hey, but what if the partnership firm comprises of only two partners and one bloke decides to retire from the partnership firm? How would the firm continue, and in what shape or form? Wouldn’t a one-partner firm be an oxymoron?
Well, in case a firm has two partners and one of the partner decides to retire, it would result in dissolution of the firm as a Partnership must have at least two partners.
The remaining partner may settle his issues with the outgoing partner and may simply carry on the concern as a sole proprietorship.
Postscript
Retiring from the firm would simply mean that one partner has withdrawn from the firm and the residuary firm i.e. the remaining partners continue to carry on the business without any dissolution of the partnership. It means that there is a severance of partnership between the retiring partner and the remaining partners of the firm.
