Reconstitution of Firms

What is a Partnership Firm?

A partnership firm is defined as an association where one or more parties come together and run a business to earn profits. According to the constitution of India, “A partnership is a relationship between individuals who have agreed to share profits from a business carried on by them all or by one of them acting for all”.

All the members involved in the firm are called partners and collectively called the ‘partnership firm’. The partners involved in the firm share profit and losses mutually. 

What is the Reconstitution of Partnership Firms?

Reconstitution of partnership firms is known as changes in the basic formation of the firm or restructuring the partnership firms. If the reconstitution of the partnership firm occurs then old agreements end and new agreements start between the partners. 

Various factors are involved in the reconstitution of the firm such as mutual consent of all partners, changes in the basic idea, etc.

What are Various Modes of Reconstitution Firms?

There are various methods through which the reconstitution of the firm can occur. They are mentioned below:

• Change in the profit ratios
• The sudden demise of the partner
• Insolvency of the partner
• Expulsion of partner 
• Retirement of partner
• Admission of a new partner in the firm 

Let us discuss all the modes in detail. They are as follows:

• Admission of a New Partner 

A firm can admit new partners if they get consent from all other existing partners. According to section 31 of the Partnership Act, a person can be introduced into the firm only with the mutual consent of all the partners.

• Retirement of the Partner 

A  partner can leave the firm when he/she decides to willfully retire from the partnership firm. There can be various reasons for retirement such as poor health, old age, environmental conditions or any other reasons. Section 32 states that a partner can retire from the firm under the following conditions:

• With mutual consent of all the partners 
• If the agreement allows the concerned partner
• If a partner wants to retire then he/she should give prior notice in writing

Outgoing partners are also known as retiring partners. 

• Expulsion of the Partner 

Expulsion of the partner is defined as the exit of the partner from the firm with the mutual consent of the involved members. A partner can be expelled from the firm if the following conditions apply:

• If all the partners agree to the expulsion 
• The decision of the expulsion should be made by the majority of the members
• The power of expulsion should be made in good faith 

Insolvency of the Partner 

According to the Partnership Act, 1932 section 34 states that:

• The insolvent partner cannot be a member of the firm from the date he/she is declared insolvent 
• It is not important to give notice to other partners in case of insolvency of a particular member

Death of the Partner 

According to the Partnership Act, 1932 Section 42 states that:

• If after the death of the partner the firm decides to continue the business the partner is liable for his acts done or liabilities incurred before the death 
• Change in profit sharing ratios among the partners

During the agreement, a particular ratio of profit sharing is decided by the members. In case the ratio of profit sharing is changed then it will come under the reconstitution of the firm. Even a slight change in the profit-sharing ratio should be discussed among the other members and mutual consent must be taken from all the partners.

Conclusion 

Reconstitution of the firm is a crucial step. There are many effects due to the reconstitution of the firm such as a change in mutual duties and rights, etc. 

The reconstitution can occur due to the death of the partner, insolvency of the partner or change in the profit-sharing ratio. When the reconstitution of a business occurs a new agreement is signed and made official between the existing members of the firm.