Chapter V - Incoming and Outgoing Partners
Section 38
Section 38: Continuing guarantees after a change in firm
Section 38 provides a default rule for continuing guarantees when the constitution of a firm changes.
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Need advice on Section 38?
This article is for general information. Refer to the Indian Partnership Act, 1932 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
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.
Central rule and applicability
A continuing guarantee given to the firm, or to a third party for the firm's transactions, is revoked as to future transactions from the date of a change in the firm's constitution, unless there is an agreement to the contrary. Both guarantees benefiting the firm and guarantees concerning its transactions can therefore require review on reconstitution.
Limits and related provisions
The rule is expressly subject to a contrary agreement and concerns future transactions. It should not be treated as automatic cancellation of liabilities already covered before the change. Whether a particular event changes the firm's constitution and what the guarantee says need factual and contractual assessment under the applicable law.
Hypothetical business example
Hypothetical: A firm admits a new partner while relying on a continuing guarantee for ongoing purchases. Before the next order, the adviser reviews whether the guarantee continues despite reconstitution or whether the statutory future-transaction revocation applies.
Practical decision flow
Identify the continuing guarantee, its beneficiary and the transactions it covers.
Record the change in constitution and read any clause dealing with continuation despite such changes.
Separate past exposure from future transactions and obtain an appropriate renewed or confirmed arrangement where needed.
Check the applicable state law
This guide explains the central Section 38 baseline. State amendments, notifications and rules can affect its application. Confirm the law applicable to the firm's location and the relevant partnership agreement before acting.
Practical checklist
Do
- Identify the continuing guarantee, its beneficiary and the transactions it covers.
- Record the change in constitution and read any clause dealing with continuation despite such changes.
- Separate past exposure from future transactions and obtain an appropriate renewed or confirmed arrangement where needed.
Avoid
- The rule is expressly subject to a contrary agreement and concerns future transactions. It should not be treated as automatic cancellation of liabilities already covered before the change. Whether a particular event changes the firm's constitution and what the guarantee says need factual and contractual assessment under the applicable law.
Glossary
- Continuing guarantee
- A guarantee covering a continuing series of relevant transactions.
- Change in constitution
- A change in the firm's composition relevant to the statutory default.
Frequently asked questions
Does the rule apply despite a contrary agreement?
No. It expressly operates in the absence of agreement to the contrary.
Are past transactions automatically wiped out?
No. The stated revocation concerns future transactions from the change date.
Can a guarantee given to the firm be affected?
Yes. The text covers guarantees given to a firm as well as specified guarantees to third parties.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026