N R Chanyal

9792288999 M.Sc., LL.B., CAIIB

8218317289 Advocate, Legal Advisor & Consultant to Banks

Regd. No. UK.527/2016
Former DGM Allahabad Bank
Former State Director for RSETI, Uttarakhand (GOI)
Office: Vaishali Colony, Behind Brij Lal Hospital, Nainital Road, Haldwani-263139
Residence: House No-36, Lane No.-7, Adarsh Nagar, Talli Bamori, Haldwani-263139

Date: 12.07.2019

Sub: Opinion regarding operation in Bank’s loan ‘Cash Credit’ Account on

retirement of partner (s) and reconstitution of the partnership firm.

Section 32 of The Indian Partnership Act, 1932 which relates to the retirement of a
partner states that:

“(1) A partner may retire —

a) with the consent of all the other partners,

b) in accordance with an express agreement by the partners, or
c) where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts
of the firm done before his retirement by an agreement made by him with such third
party and the partners of the reconstituted firm, and such agreement may be implied
by a course of dealing between such third party and the reconstituted firm after he
had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement, until public
notice is given of the retirement:

Provided that a retired partner is not liable to any third party who deals with the firm
without knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.”

Sub section (2) and (3) of the Section 32 of Indian Partnership Act 1932 clearly
mention about the liability of an outgoing partner.

It is clear that the retired partner, however, continues to be liable for acts of the firm
done before such retirement of a partner. This liability holds good unless there is an
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agreement between him, the concerned third party and partners of the reconstituted
firm.

Considering the above mentioned provisions, the Bank has options as under:
A) Where the Bank wants to keep the outgoing partners liable, it should
not recognize reconstitution.

 If the bank does not recognize the reconstitution the following action is
suggested:
i) Give notice to the retiring partners to the effect that they would not
be released of their liability.
ii) The account should be frozen under notice to all partners.
iii) No credit/debit should be allowed to avoid operation of rule laid down
in Clayton's case.

B) In case the bank recognizes the reconstitution, it is suggested to ask

for :

i) Consent letter from guarantor (s).

ii) Consent from mortgagors to the effect that the mortgage will continue
to be available for the drawings of the reconstituted firm.
iii) Confirmation of balance by all the remaining partners of the
reconstituted firm.

In the present case, I understand that Bank recognizes the reconstitution

and want to continue the credit facility provided to the firm. The copy of the
Supplementary/ Retirement Deed perused by me inter alia provides that:

 The continuing partners have taken over all the liabilities of the firm from the
date of reconstitution of the firm.
 Capital including interest and share of profits of the retiring partners shall be
treated as interest free unsecured loan to be repaid in future and shall be
considered as full discharge and satisfaction of all rights conferred upon the
retiring partners.

In order to continue the credit facility to the firm, in my opinion Bank may
take the following steps in addition to the actions stated under para B above:

1. All loan documents duly executed by the continuing partners and guarantors
may be taken afresh.
2. Consent from mortgagors to the effect that the mortgage will continue to be
available for the drawings of the reconstituted firm may be obtained.
3. The entire loan outstanding as on date may be set aside by obtaining afresh
cheque jointly signed by the continuing partners if the same account number
is to be continued otherwise the existing account may be closed by opening
a new account in the name of the firm.
4. By accepting the reconstitution of the firm Bank will discharge the retiring
partners from their several liabilities, hence Bank may consider taking fresh
security taking into consideration the value of the collateral security (ies)
available with the Bank.
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5. The reconstituted deed of the firm should be got registered with the
competent authority.
6. The borrowing firm may be asked to seek prior permission of the Bank to
repay the capital including interest and share of profits of the retiring partners
retained as “Unsecured Loans”.

(N. R. Chanyal)