Sanchit Srivastava, Dr. Ram Manohar Lohiya National Law University
§ 37 of the Indian Partnership Act 1932 provides the law pertaining to the liability of a surviving partner who without settling the accounts of the partnership with the estate or the legal representatives of the deceased partner uses the assets of the partnership for continuing business on his own accord. The section states that when upon the death of a partner, the surviving partners carry on the business without any final settlement, then the deceased partner’s estate is entitled to such profits
The true principle behind this is that there exists a fiduciary relationship between the surviving partner(s) and his former partner or the representatives of his former partner. Equity does not permit the surviving partner to trade with the property of the retired partner for his own profit. The valuation of the share of a deceased partner, as per Halsbury’s laws, should take place as at the date of realization, and not at the date of death.
Introduction – Objects and Reasons
The Special Committee while making the draft leading to the present Partnership Act had the following objects and reasons in mind with regards to the current S. 37 of the Act:
“Clause 37 is Section 42 of the English Partnership Act with a few verbal changes, and with the Indian standard rate of 6 per cent substituted for the English standard rate of 5 per cent.”
42 of the English Partnership Act, 1890 which is the analogous law to S.37, states that:
“RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE PROFITS MADE AFTER DISSOLUTION
(1) 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 its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement 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 the dissolution as the Court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of five per cent per annum on the amount of his share of the partnership assets.
(2) Provided that whereby the partnership contract 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.”
Scope and Applicability
This section provides the substantive law pertaining to the liability of a surviving partner who without settling the accounts of the partnership with the estate or the legal representatives of the deceased partner uses the assets of the partnership for continuing business on his own accord.[i]
The section states that when upon the death of a partner, the surviving partners carry on the business of the continuing firm with the property of the firm without any final settlement of accounts between them and the estate of the deceased partner, then his estate is entitled to such profits which had been made since the former partner ceased to be a partner as may be ascribed to the use of the share of his property.[ii]
37 represents a well recognized principle of partnership law, that after the dissolution of the partnership firm a partner has the use of partnership assets or the profits which are attributable to the share of a partner and he must either pay interest or he must pay the profits which have accrued by the use of these assets.[iii]
On the death of a partner, if the shares of the deceased partner in the partnership business remain and the business is continued, the estate of the deceased partner is entitled to the subsequent profit earned by the business as may be imputed to the use of the estate of in the firm or to have interest at the rate of 6% p.a. on the shares of the deceased partner in the assets of the firm provided there was a final settlement of accounts between the firm and the estate of the deceased partners.[iv]
The doctrine of accession is not the true principle on which this section is based. The true principle behind this is that there exists a fiduciary relationship between the surviving partner(s) and his former partner or the representatives of his former partner. Equity will never permit the person standing in a fiduciary relationship with another to trade the property of that other person for his own profit.[v]
The LORD CHANCELLOR in Knox v Gye[vi] observed that:
“There is a fiduciary relationship between them. The surviving partner alone having the legal interest in the partnership property, and being alone able to collect it, there arises a right in the representatives of the deceased partner to insist on the surviving partner holding the property, whenever received, subjects to the rights of the deceased partner, and he cannot make use of the partnership assets without being liable to an account for them.”
Rights of an Outgoing Partner
Dealing with the right of an outgoing partner, LORD LINDLEY[vii] has observed:
“If, as will usually be the case, the agreement establishes the manner in which the deceased or outgoing partner’s financial entitlement in respect of his share is to be ascertained and paid and provides for the devolution of the legal title to any partnership assets which may be vested in him, his share may properly be regarded as pure debt with effect from the date on which he ceased to be a partner…
In any case in which a share falls to be valued in the above way, it will be important to determine the date on which such value is to be taken. Where there is an implied agreement for the acquisition of the deceased or the outgoing partner’s share, the relevant date will be the date on which he ceased to be a partner; where, however, a valuation is directed by the court in the exercise of its discretion, the relevant date will be the date on which the share is actually valued. In the former case, the outgoing partner will be ‘compensated’ for any delay in the payment of his financial entitlement by a right to interest or, at his (or his estate’s) opinion, a share of profits attributable to the use of his share, but he cannot also claim a share of any capital profits attributable to increases in the value of the partnership assets since the date on which he ceased to be a partner.”
In HALSBURY’S LAWS OF ENGLAND[viii], it is stated:
“The valuation of the share of a deceased partner should take place as at the date of realization, and not at the date of death; but while a surviving partner exercises an option to buy the share of a deceased partner at a valuation, and the valuation is not completed until some months after the death, the dissolution takes effect as at the date of the death, and the executors of the deceased partners are entitled to a share of profits upto the date of valuation and to interest on the amount of the valuation after that date…”
The rule embodied in this section is only a breach of a well recognized doctrine that if a trustee mixes the trust fund with his own monies and employs them both in a trade of his own, the cestui que trust may either claim a proportional share of the profits or interests on the amount of trust funds so employed.[ix]
In Kottuva S. Thulassi Ammal v RMK Ramchandra Naidu[x], it was held by the Madras HC when a partner was wrongfully expelled from the firm while the remaining members of the partnership continued the business without him, the principles of this section would apply even if the expulsion did not bring about dissolution the plaintiff was entitled to relief in the form of interest pari passu.
“Attributable to the use of his share”
In England, this principle has been consistently applied both before and after the Act. Where the profits are not solely attributable to the use of the share, the court may order an inquiry and apportionment of profits.[xi]
In India, this question has arisen with respect to S.241 of the Contract Act and S.88 of the Trusts Act.
It was held by the Andhra High Court in Chillakuru Chandrashekhara Reddy v Pamuru Vishnu Vinod Reddy [xii]that the share of a partner on his retirement or death is in the nature of a pure debt with effect from the date he ceases to be a partner, and this would be the relevant date for valuation of the share.
In Lachmi Narain v Beni Ram[xiii], it was held that where one of the two partners dies, and the survivor retains the partnership capital in his hands and employs it in trade, he is bound to render and account of the profits of the partnership to the legal representative of the deceased partner from the death to the date of final decree.
Where a partnership ‘at will’ is dissolved and the assets of the outgoing partner was put to use in the conduct of the business of the partnership from the date of dissolution till the conclusion or the ‘winding up’ of all businesses of the partnership, by strict construction of S.37 an outgoing partner is entitled to interest over net or surplus assets of the partnership after satisfaction of the partnership liabilities.[xiv]
If the deceased or outgoing partner had transferred his share to another person, such transferee stands on the same footing as the partner himself.[xv]
“Contract to the contrary”
It has been well explained in the English case of Vyse v Foster[xvi], in which the agreement provided that on the death of a partner the amount of his share should be ascertained and be paid out with interest, by instalments, and in a suit for the share of assets and profits subsequent to the death of a partner, it was held that the plaintiff was not entitled to profits but only interest.
Surviving partner cannot trade with the property of former partner
As stated above the doctrine of accession is not the true foundation of this section. The true principle is that of a fiduciary relationship which exists between the existing partner and the former partner or the representatives of the former partner. Equity does not permit the surviving partner to trade with the property of the retired partner for his own profit. He must hold the profit he is making in trust for the owner of the property, the use of which produced profits.
It is a wrong contention that the rule recognized in P. 37 would not apply unless the entire share of the deceased partner in the firm’s assets had been used by the surviving partners in continuing the business and if only the cash assets or a portion thereof had been so used, the rule will not apply. This contention is opposed to the reason behind the rule and is prima facie untenable. If in the case of a money-lending business the assets on the date of dissolution consist of lands purchased by the firm by way of realization and also of cash on hand and realizable outstanding, the fact that the cash assets alone are utilized in the conduct of the business after dissolution, does not render the rule inapplicable or disentitle the representatives of a deceased partner to interest on the portion of the assets so utilized in the business.[xvii]
Right of legal representatives to claim profit
The right of the deceased or outgoing partner to the share of profits mentioned in this section is dependent upon the surviving or continuing partner ‘carrying on the business of the firm with the property of the firm’. The claimant has therefore to prove that the business of the firm has been carried on by the surviving partner notwithstanding the dissolution of the firm. The carrying on of a similar business by the partner after the termination of the partnership does not bring the case within the equitable principle enunciated by the section.
In Mohansundaram v Neelambal[xviii] the Madras High Court held that:
“The entire basis of the rule is that if the surviving partner in breach of the right of the quondam partner or his representatives under S. 46, Partnership Act to have the accounts settled and the affairs of the firm wound up and the surplus if any distributed, continues the business, the partner who thus wrongly acts is subject to the obligations of a partner but not entitled to claim rights in such capacity.”
An outgoing partner is entitled to seek settlement of accounts and in case the partner who purchased the share of the outgoing partner has not abided by the terms therein and not paid any consideration then, he can ask for accounting, that from out of the profits and the capital, the liabilities have to be discharged first and thereafter whatever assets had been left, from out of which, the share of the partner has to be paid.[xix]
After dissolution of partnership by death of a partner the duties of the surviving partner to the representatives of the deceased partner, are not more onerous than those of a partner to his other partners in an ongoing partnership. Surviving partners are not trustees for them nor are liable to them otherwise as debtors.[xx]
The claim of a legal representative of a deceased partner or partners under this section is either a claim for an account or a claim for a specific amount representing the deceased partner’s share together with interest thereon. What this section provides for is apportionment of profits and not of assets, thus completely excluding the liabilities out of this section. A claim for partition is not supported under this section.[xxi]
The estate of a deceased partner is entitled to the benefits of any increase in the value of the partnership assets taking place after his death but before the final realization.[xxii] Also the estate does not acquire any independent interest in the property of the firm till the firm is dissolved and the accounts settled. The estate of a deceased partner or the retiring partner has a right to demand settlement but not to interfere in the matters of the firm.[xxiii]
A minor entitled to claim the assets of his deceased father in partnership cannot claim as a right a share in the profits of the firm. There is a fiduciary relation between surviving partners of the firm and legal representatives of deceased partner. Amount due to deceased its loan and nothing more. There are innumerable difficulties in the way of account being taken. Discretion must be left to the court to act on behalf of the minor.[xxiv]
Pari materia provision(s) in the Limited Liability Partnership Act 2008
A person may cease to be a partner of an LLP in accordance with an agreement with the other partners; and this is governed by S. 24 of the LLP Act 2008. S. 24 (5) is the provision which is to an extent pari materia with S. 37 of the Indian Partnership Act. S. 24 states that:
“(5) Where a partner of a limited liability partnership ceases to be a partner, unless otherwise provided in the limited liability partnership agreement, the former partner or a person entitled to his share in consequence of the death or insolvency of the former partner, shall be entitled to receive from the limited liability partnership –
(a) an amount equal to the capital contribution of the former partner actually made to the limited liability partnership; and
(b) his right to share in the accumulated profits of the limited liability partnership,
after the deduction of accumulated losses of the limited liability partnership, determined as at the date the former partner ceased to be a partner.”
A former partner or in case of the death of a partner his representatives does not have the right to interfere in the management of LLP (S. 24(6) LLP Act).
Edited by Neerja Gurnani
[i] Laxmidas Dayabhai Kabrawala v Nanabhai Chunilal Kabrawala, AIR 1964 SC 11.
[ii] Satish Aggarwal v Subhash Chandra Aggarwal, 2001 (1) RAJ 35 (Del).
[iii] Markanda, PC, The Law of Partnership, 1st Edn. 2010, LexisNexis Butterworths Wadhwa
[iv] Tilokram Ghosh v Gita Rani Sadhukhan, AIR 1989 Cal 254.
[v] Ramanarayan v Kashinath Jagnarain, AIR 1954 Pat 53 (DB).
[vi] (1872) LR 5 HL 656.
[vii] Lindley On Partnership, pg. 458.
[viii] 4th Edn, vol. 35, pg. 108 para 189.
[ix] Supra 3. Cf. Kasi v Rm. A. Rm. V. Ramanathan Chettiar, AIR 1949 Mad 693.
[x] AIR 1955 Mad 171 (DB).
[xi] Featherstonhaugh v Turner, (1858) 53 ER 693.
[xii] AIR 1995 AP 49, 53.
[xiii] (1931) ALJ 81.
[xiv] Hedayetullah v Mohamed Kamil, (1924) PC 93.
[xv] Muthiah Chetty v Veerappa Chetty, (1929) 52 Mad 509.
[xvi] (1874) 7 HL 318.
[xvii] Kasi v Rm. A. Rm. V. Ramanathan Chettiar, ibid 9.
[xviii] AIR 1955 Mad 442 (DB).
[xix] Supra 17.
[xx] Markanda, PC, The Law of Partnership, 1st Edn. 2010, LexisNexis Butterworths Wadhwa. Cf. ibid.
[xxi] SK Sahul Hamid v SM Sulthan, AIR 1947 Mad 287.
[xxii] Barclays Bank Trust and Co. v Bluff, (1981) 3 All ER 232.
[xxiii] Rajnikant Hasmukhlal Golwala v Nalraj Theatre, AIR 2000 Guj 80.
[xxiv] Siddick Kumar Sait v Mahomer Hussain Sait, AIR 1917 Mad 71.