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CA Foundation · Business Laws · The Indian Partnership Act, 1932

Chetan, Deepa and Esha are partners in a firm. Deepa retires and the firm's other partners continue the business under the same name. Chetan and Esha agree that Deepa's liability for existing debts will end. Her old creditor, Farhan, was not a party to this and later receives full information. When is Deepa discharged from liability for the debt owed to Farhan?

Deepa is discharged from liability for the old debt only if Farhan, knowing of the retirement, agrees with the continuing firm to release her. This agreement may be implied from his course of dealing. A private understanding among the partners alone does not bind him.

  1. AImmediately, because the partners agreed among themselves
  2. BOnly when Farhan, with the knowledge of the retirement, agrees with the reconstituted firm to discharge her, which may be implied from his course of dealingCorrect
  3. CNever, because a retired partner always remains liable for old debts
  4. DAutomatically after one year of retirement

Explanation

A retiring partner can be discharged from liability for past firm debts by an agreement between her, the creditor and the continuing partners; such agreement may be implied from the creditor's course of dealing after knowing of the retirement. An agreement among partners alone does not bind the creditor, so option A is wrong. There is no automatic discharge after one year.

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