Transferee of Partner’s Interest Under Section 29 of Indian Partnership Act

Section 29 of the Indian Partnership Act, 1932 deals with the rights of a transferee of a partner’s interest in a partnership firm. A partner can transfer his share or interest in the firm to another person, but such transfer does not make the transferee a partner. The transferee is only entitled to receive the profits belonging to the transferring partner and gets further rights only after dissolution of the firm or cessation of the partner’s interest.

What Is Transferee of Partner’s Interest Under Section 29?

A transferee of a partner’s interest refers to a person who acquires the financial interest of a partner in a partnership firm through transfer. Such transfer may take place by way of an absolute transfer, mortgage, or creation of a charge over the partner’s interest in the firm.

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Section 29 of the Indian Partnership Act, 1932 recognises the right of a partner to transfer his interest in the firm. However, the transfer is limited only to the economic benefits attached to the partner’s share. The transferee does not obtain the status, rights, or responsibilities of a partner.

A partnership firm is based on mutual trust and agreement between partners. Therefore, a partner cannot introduce a third person as a partner merely by transferring his interest. The consent of all existing partners is necessary for admitting a new partner into the firm.

Thus, Section 29 creates a balance between two principles:

• A partner has the right to transfer his financial interest in the partnership.
• The remaining partners have the right to prevent an outsider from interfering in the management and affairs of the firm.

Meaning And Scope Of Section 29 Of Indian Partnership Act, 1932

Section 29 provides that when a partner transfers his interest in the firm, either absolutely or through mortgage or charge, the transferee does not get the same rights as the original partner.

The provision can be understood in two situations:

Rights During The Continuance Of The Firm

When the partnership firm continues to exist and business operations are carried on, the transferee has limited rights.

The transferee is entitled to:

• Receive the share of profits of the transferring partner.
• Receive profits according to the accounts prepared and accepted by the partners.

However, the transferee cannot:

• Participate in the management of the firm.
• Interfere in business decisions.
• Demand accounts of the partnership firm.
• Inspect the books of accounts of the firm.

Therefore, the transferee only receives the monetary benefit attached to the partner’s share but does not acquire control over the partnership business.

Rights After Dissolution Of The Firm

Section 29(2) provides additional rights to the transferee after the dissolution of the firm or when the transferring partner ceases to be a partner.

In such circumstances, the transferee becomes entitled to:

• Receive the share of assets of the firm to which the transferring partner was entitled.
• Obtain an account for determining the value of such share from the date of dissolution.

Therefore, the rights of the transferee become wider after the partnership relationship comes to an end.

Can A Partner Transfer His Interest In A Partnership Firm?

Yes, a partner can transfer his interest in a partnership firm. Section 29 allows such transfer either by absolute assignment, mortgage, or creation of a charge on the partner’s interest.

However, such transfer does not result in the transfer of partnership rights.

A partner’s interest in a firm consists of both:

• Financial interest, including the right to receive profits and assets.
• Personal rights arising from the partnership relationship, such as participation in management and decision-making.

Only the financial interest can be transferred. Personal rights cannot be transferred without the consent of other partners.

For example, if A, a partner in a firm, transfers his share to B, B cannot demand participation in the business activities of the firm. B can only claim the profits that A was entitled to receive.

Does A Transferee Become A Partner In The Firm?

No, a transferee does not become a partner of the firm merely because a partner transfers his interest.

The relationship of partnership is created through an agreement between persons. Under the Indian Partnership Act, a person can become a partner only with the consent of existing partners.

A transfer of interest does not:

• Create a partnership relationship between the transferee and other partners.
• Give the transferee authority to represent the firm.
• Make the transferee liable for partnership obligations.

The transferee is sometimes described as a sub-partner because the person receives benefits arising from a partner’s share but does not become a direct partner in the original firm.

Rights Of Transferee During Continuance Of Partnership Firm

Section 29(1) specifically limits the rights of a transferee while the firm continues its business.

Right To Receive Share Of Profits

The primary right of a transferee is to receive the share of profits that belongs to the transferring partner.

For instance, if a partner is entitled to 30% of the profits of the firm and transfers his interest to another person, the transferee can claim the profits arising from that 30% share.

However, the transferee cannot independently calculate profits or challenge the manner in which accounts are prepared by the partners.

No Right To Participate In Business Management

A transferee cannot interfere in the conduct of the business.

The right to manage the firm remains with the partners because management rights arise from the partnership agreement and cannot be transferred without consent.

Therefore, the transferee cannot:

• Attend partnership meetings as a partner.
• Take business decisions.
• Represent the firm before third parties.

No Right To Inspect Partnership Books

The transferee cannot demand inspection of the books of accounts of the firm.

The reason behind this restriction is that inspection of accounts is a right available to partners because of their legal relationship with the firm. Since the transferee is not a partner, such rights are not available.

Obligation To Accept Partnership Accounts

The transferee must accept the accounts of profits prepared and agreed upon by the partners.

The transferee cannot challenge the accounts merely because the profits calculated are different from expectations.

Rights Of Transferee After Dissolution Of Firm

The position of a transferee changes after dissolution of the partnership firm or when the transferring partner ceases to remain a partner.

Under Section 29(2), the transferee gets the right to claim the share of assets that belonged to the transferring partner.

For determining such share, the transferee can demand an account from the date of dissolution.

This right exists because after dissolution, the partnership relationship ends and the interest of partners in the assets of the firm has to be calculated and distributed.

Difference Between Transfer Of Interest And Sub-Partnership

The Supreme Court in Commissioner of Income-Tax v. Sunil J. Kinariwala, AIR 2003 SC 668 explained the distinction between assignment of partnership interest and sub-partnership.

In a transfer of partnership interest:

• A partner assigns his share of profits to another person.
• The transferee does not become a partner.
• The relationship between the original partners remains unchanged.

In a sub-partnership:

• A partner creates a separate partnership arrangement with another person regarding his share in the original partnership.
• The sub-partnership is independent from the main partnership.
• The rights and liabilities arise between the parties to the sub-partnership.

The Supreme Court recognised that assignment of a partner’s share and creation of a sub-partnership operate differently in law.

Whether Partition Amounts To Transfer Under Section 29?

Partition does not amount to transfer of interest under Section 29.

In V.P.R. Prabhu v. S.P.S. Prabhu, AIR 1985 Ker 285, the Kerala High Court explained that partition is only a process of separation of existing rights and does not involve transfer of rights to another person.

The Court observed that partition involves mutual renunciation where common rights over property are converted into exclusive rights over specific portions.

Therefore, Section 29 relating to transfer of partnership interest does not apply to partition.

The decision clarified that:

• Transfer involves passing of rights from one person to another.
• Partition only divides existing rights among persons who already possess those rights.

Important Case Laws Related To Transferee Of Partner’s Interest

V.P.R. Prabhu v. S.P.S. Prabhu, AIR 1985 Ker 285

In this case, the issue was whether partition could be considered a transfer under Section 29.

The Kerala High Court held that partition is not a transfer because it only separates existing rights. A person receiving a specific share through partition is not a transferee under Section 29.

The judgment clarified the limited application of Section 29 and distinguished partition from transfer.

Commissioner of Income-Tax v. Sunil J. Kinariwala, AIR 2003 SC 668

The Supreme Court discussed the difference between assignment of partnership share and sub-partnership.

The Court held that assignment of a partner’s share does not make the assignee a partner in the original firm. The rights of the assignee are limited to receiving the financial benefits attached to the assigned share.

Mangilal v. Bhanwarlal, AIR 1963 Raj 153

In this case, the transferring partner sold his interest to another partner at a value lower than the mortgage amount.

The Court held that the transferee was bound by such sale. The transferee could not claim rights beyond the interest actually available with the transferring partner.

Watts v. Driscall, (1901) 1 Ch 294

The case recognised the principle that a transferee of a partner’s interest does not obtain direct rights in the partnership business during the continuance of the firm.

Conclusion

Section 29 of the Indian Partnership Act, 1932 defines the legal position of a transferee of a partner’s interest in a partnership firm. It permits transfer of the economic interest of a partner but prevents the transferee from acquiring partnership rights without the consent of existing partners. The provision protects the principle of mutual confidence in partnership while recognising a partner’s right to deal with his financial interest. A transferee remains entitled to profits during the firm’s existence and receives further rights regarding assets only after dissolution or cessation of the partner’s interest.