Sections 37 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 37 deals with a firm that keeps trading, with the old property, after a partner has died or left, without settling accounts with him or his estate. In that case the outgoing partner or estate has an option between a share of profits and interest at six per cent. Section 38 deals with a continuing guarantee, which ends for future transactions when the firm's constitution changes. Exit terms of this kind are usually settled through a changes in partnership agreement deed.
If a partner has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business with the firm's property without any final settlement of accounts, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled, at the option of himself or his representatives, to such share of the profits since he left as is attributable to the use of his share of the property, or to interest at six per cent per annum on his share in the firm's property (s.37). A continuing guarantee given to a firm or to a third party about the firm's transactions is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm (s.38).
Section 37: when it applies
| Condition | Text |
|---|---|
| Who | A member who has died or otherwise ceased to be a partner |
| What the others do | The surviving or continuing partners carry on the business of the firm with the property of the firm |
| What has not happened | No final settlement of accounts between them and the outgoing partner or his estate |
| Contract | The rule applies in the absence of a contract to the contrary |
All four elements matter. If accounts have been finally settled, section 37 does not apply on its wording. If the continuing partners do not use the firm's property, again the section does not fit.
The option
The outgoing partner or his estate is entitled, at the option of himself or his representatives, to either:
- such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm, or
- interest at the rate of six per cent per annum on the amount of his share in the property of the firm.
The choice rests with the outgoing partner or his representatives, not with the continuing partners. Six per cent per annum is the figure in the text. The text does not say how the profit "attributable to the use of his share" is to be worked out; that needs accounts and, if disputed, a determination. For rights to goodwill and share on exit, see rights of an outgoing partner.
Example. Anil retires on 1 April. His share in the firm's property is valued at Rs 10,00,000. The continuing partners carry on using the property without settling accounts with him. For the year after, he or his representative may choose interest at six per cent per annum, which would be Rs 60,000 for a year, or claim the portion of profits attributable to the use of his share of the property. If the firm made a good profit, the second route may be worth more; if not, the first may be. The choice is his.
The proviso: an option to purchase
Where by contract between the partners an option is given to the surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate or the outgoing partner is not entitled to any further or other share of profits.
But if a partner assuming to act in exercise of the option does not in all material respects comply with its terms, he is liable to account under the foregoing provisions of the section. A half-hearted or non-compliant purchase therefore does not shield him.
Example. The deed says the continuing partners may buy out a deceased partner's interest at a valuation within six months. If they follow the terms in all material respects, the estate gets the agreed price and nothing more by way of profit share. If they skip a material term, such as the valuation method, they must account under section 37's profit-share-or-interest rule.
Section 38: continuing guarantee
A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm.
| Element | Text |
|---|---|
| Subject | A continuing guarantee given to a firm or to a third party about the firm's transactions |
| Trigger | Any change in the constitution of the firm |
| Effect | Revoked as to future transactions from the date of the change |
| Contract | Applies in the absence of agreement to the contrary |
"Change in the constitution" is not defined in the text. Admission, retirement, death or expulsion of a partner would ordinarily be such a change, but the text does not list them. The revocation is only for future transactions; the section does not speak of transactions already entered into.
Example. A bank manager, Mr Iyer, gave a guarantee for all supplies a trader would make to Shah & Co. A partner then retires from Shah & Co. From the date of that change, the guarantee is revoked for transactions after that date, unless Mr Iyer agreed otherwise. A supplier relying on the guarantee for new supplies should ask for a fresh guarantee or a written confirmation. The Indian Contract Act, 1872 deals with guarantees generally, and applies where this Act is silent (section 3).
What can the deed change?
- Section 37: applies "in the absence of a contract to the contrary". The deed can fix a different payout, a purchase option, or a method of valuation.
- Section 38: applies "in the absence of agreement to the contrary". A guarantee can be drafted to survive changes in the firm.
Practical points
- Settle accounts with an outgoing partner or estate soon after exit. The longer the firm carries on without settlement, the more section 37 may bite.
- Put an option to purchase in the deed with clear terms and comply with them in full.
- If you hold a guarantee for a firm, ask for a fresh one after any change in partners. For tax questions about the payout, see our income-tax guides, such as partnership firm taxation under ITA 2025.
Need help settling with an outgoing partner?
Where a partner exits and the firm carries on, the payout, interest and guarantees can all be tied up. Our changes in partnership agreement team can draft the exit deed and any purchase option, and review whether guarantees need renewing. We can also help with the settlement itself.
Key takeaways
- Section 37 applies where continuing partners use the firm's property without final settlement with an outgoing partner or his estate.
- The outgoing partner or estate chooses between a profit share attributable to the use of his share of the property and six per cent per annum interest.
- A duly exercised contractual option to purchase ends the profit claim; non-compliance in a material respect brings back liability to account.
- A continuing guarantee for the firm's transactions is revoked for future transactions from the date of any change in the firm's constitution, unless agreed otherwise (s.38).
Read next
- Sections 35 and 36: deceased partner's estate and competing business
- Sections 39 to 41: dissolution by agreement and compulsory dissolution
- Section 32: retirement of a partner
- Reconstitution of partnership: admission and retirement
Disclaimer: Based on the text of the Indian Partnership Act, 1932 as consulted on 1 October 2026. Several States have amended the registration chapter and make their own rules, forms and fees for the Registrar of Firms. This article is general information, not legal advice; check the official text and your State's rules before acting.