All About Reconstitution of Partnership

Imagine a situation where you have entered into a partnership agreement with two others. It is decided amongst all that the capital contribution will be 2:1:2. However, one of the partners later backs out and says that he cannot contribute the agreed amount. So, again it is decided that the capital contribution will be 2:1:1. This rearrangement can be termed as the reconstitution of Partnership.

Various reasons can lead to changes in the structure of the Partnership. The change can be the result of admission of a new partner or death of a partner, or retirement of a partner. Such change is called the reconstitution of Partnership. Therefore, it can be said that any change in the constitution of the firm or the existing relationship of partners is the reconstitution of Partnership. This results in a change of the firm, which puts an end to the pre-existing agreement between the partners, and a new agreement comes into force.

Need for reconstitution of partnership firm

The process of reconstitution of Partnership can lead to the following changes: –

• Determining of sacrificing and gaining ratio between the partners
• Accounting for goodwill
• Accounting treatment of reserves and accumulated profits
• Accounting for revaluation of assets and liabilities
• Adjustment of capitals
  

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Modes of reconstitution of partnership firm

1. Change in profit sharing ratio among partners

When there is a change in the amount of profit shared among partners, this is the reconstitution of Partnership. This change is done with the mutual consent of all the partners, and it results in the formation of a new partnership deed.

2. Admission of a new partner

When a new partner is admitted to a firm, it is termed as reconstitution of Partnership. The essentials for admitting a new partner in a firm are:

• Consent of the current partners for admission
• The admission should conform with the agreement between the partners and the partnership agreement

The partner who is newly admitted is also known as the ‘incoming partner.’ The admission of the new partner will not be obligatory on the partnership firm unless there is an agreement to the contrary.

3. Retirement of a partner

When the retirement of the partner takes place, this is called the reconstitution of Partnership. These are the following essential for the retirement of an existing partner in the firm –

• Consent of the current partners for retirement
• The retirement should conform with the agreement between the partners and the partnership deed

The retiring partner is also called the ‘outgoing partner.’ The responsibility of the retiring partner does not end till the day he retires. However, in certain cases, the liability is discharged. They are:

• The partners of the reconstituted firm decided to take over his responsibility
• The third-party decides to set off the obligation of the retiring partner and admits the partners of the new firm as the debtors.

4. Removal of a partner

When an existing partner is expelled, it is called the reconstitution of Partnership. The essentials for the of expulsion an existing partner in the firm is:

• Partnership deed must give the power to expel the partner
• It should be exercised by the majority of the partners
• It should be done in good faith

There is no liability of the expelled partner for the acts or debts of the firm after being expelled from the firm. The partner is only liable for the transactions made in the tenure of his Partnership. This, however, is discharged when:

• The partners of the reconstituted firm decided to take over his responsibility
• The third-party decides to set off the obligation of the retiring partner and accepts the partners of the new firm as the debtors.

5. Insolvency of a partner

When the insolvency of a partner takes place, it is called the reconstitution of Partnership. When an existing partner is declared insolvent, the following things must be kept in mind:

• The insolvent partner ceases to be the partner of the firm from the date of being insolvent
• Dissolution of the firm takes place when no provision is stated in the contract.

6. Death of a partner

When the death of a partner takes place, it is called the reconstitution of Partnership. The domain of the deceased partner is liable for his acts done or liabilities suffered before his death. It is, however, satisfied if the firm agrees to stay in business.

Impact of reconstitution of partnership firm

When the structure of a partnership firm is altered, many changes occur. The impact of reconstitution of Partnership are as follows –

1. Change in mutual rights and duties

The rights and duties of the partners remain the same as they were before. There is no change in the rights and liabilities of the partners in case of reconstitution of Partnership.

1. Revocation of continuing guarantee

The continuing guarantee given on behalf of the firm stands revoked as to future transactions in the case of the reconstitution of Partnership from the date of reconstitution. This is one of the important impacts of the reconstitution of partnership firms.

Conclusion

Any change made in a partnership firm, however big or small it is, leads to the reconstitution of Partnership. There are various consequences of the reconstitution of Partnership. It is wise to take expert legal advice while drafting an agreement for the Partnership to know the rights and liabilities of partners after reconstitution. The concept of reconstitution of Partnership is important for the development and growth of the business.