Regarding exiting partnership

Querist : Anonymous (Querist) 21 April 2024 This query is : Resolved
Hai sir,
Before My question, let me explain the situation. My friend has been in a partnership for 5% of 9cr project (loan).
Later before completion of project, there was a differences between him and the managing partner, as the managing partner is not properly spending the funds, when asked him, he said if you want to quit I am taking over your share and written an agreement on Rs 10 stamp paper and also given an affidavit that he is responsible for all the loss and you are not responsible for any financial or bank related issues.
Now the project is not yet completed and the funds are exhausted.

Here his property and the project can cover the lender amount.
He was not removed from the partnership deed as there was loan.
Now, if the lender goes for auction, does my friends property too will be auctioned? Will the affidavit given to him will be helpful to exit with out auction?
Does he should take any other documents from him?
Please provide your valuable suggestions sir.

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Quick Summary

This discussion addresses a partner's concern about personal liability after leaving a project due to mismanagement and fund exhaustion. While an affidavit might offer some evidence, it's not legally binding for exiting a partnership. To be fully released from liability, a formal 'Reconstitution of Partnership deed' is essential. Without this, the exiting partner remains jointly and severally liable for all partnership debts, and personal assets could be at risk if the lender pursues recovery.

T. Kalaiselvan, Advocate (Expert) 21 April 2024
The unregistered affidavit or undertaking or indemnity bond may not be enforceable in law though it can be used as evidence in the suit that may be filed.
The property given as collateral shall be utilized by the bank in case of default in loan repayment.

kavksatyanarayana (Expert) 21 April 2024
All the continuing partners and the outgoing partner (your friend) must execute a "Reconstitution of Partnership deed" on proper stamp duty, otherwise your friend is responsible for his share in the business.

SIVARAMAPRASAD KAPPAGANTU (Expert) 22 April 2024
Unless and until a proper retirement of a Partner is brought on record, and the Partnership is reconstituted, the Partners are Jointly and Severally liable for all the debts of the Partnership firm. Even after the retirement is brought on record with a reconstituted Partnership Deed if the Lender did take Personal Guarantee from all Partners at the time of sanctioning the loan, which is the normal practice of the Lenders, especially Banks, the Personal Guarantee stands valid, irrespective of the retirement of the Partner and reconstitution of the Partnership firm at a later date after the date of the loan. Usually, when a Partner retires, such a Partner seeks to be released from the Personal Guarantee by the Bank and the reconstituted Partnership firm offers another Personal Guarantee of an incoming Partner or another person having enough net-worth. Then the retiring partner shall be free from liability.

Therefore, in case the Lender proceeds against the Partnership firm, such a Lender can attach the assets of any or all of the Partners. The lender may proceed to seize and take over the collateral security and dispose of it to realize his dues. If such collateral security is no longer available (like stocks etc. under hypothecation) or such collateral security is of no marketable value, not easy to dispose of, or not enough to cover his dues, then the Lender proceeds against the assets of the Partners who have willy-nilly given Personal Guarantees. From the Lender's point of view, he always looks at which of the assets are easy to attach, dispose of, and realize his dues, be it collateral security, be it the assets of the Partners. In the process, if the Lender proceeds against one of the Partner's assets and realizes his dues, the Partner who paid the dues to the Lender, with or without disposing of his assets, can proceed against the remaining Partner/s for recovery of his dues, minus his share of loss.

P. Venu (Expert) 26 April 2024
Admittedly, he has not duly retired from the partners. As such, he continues to be liable.

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