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Liability of a Partner by Holding Out in Partnership Act, 1932

A Partnership arises out of Contract and hence is governed by general principles of both Contracts and the Partnership Act, 1932. It has been provided in the Partnership Act that until and unless the provisions of Contract Act are inconsistent with the partnership Act, they are applicable to partnerships. Hence, the rules relating to offer, proposal, acceptance, agreement, contract, etc. are valid for partnerships as well but the rules regarding the minor are different the Partnership Act specifies about them.

Section 4 of the partnership Act defines Partnership as, “relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”[1] In a partnership two or more persons join together for business or trade purpose and work together. It is considered better than sole-trade business as in this only a single person invests his resources, skills, interests etc. which is limited whereas this all increases in a partnership. Partners pool their resources and efforts and set up a bigger and larger business with more investment. This partnership helps to expand the business in a way a single individual could not have afforded and similarly in the loss, as well, the burden gets divided equally or according to the shares among the partners.

Partnership and Company:
A partnership differs from a company as the maximum numbers of partners can be 10 or 20 depending on the nature of the partnership (banking business 10 and any other 20) whereas a company can have as many as 50 (private company) to any number (public company) of members according to the Companies act, 1956. A partnership is again better than a company as a company is subject to statutory control, there are more procedural formalities and it is a legal entity.

Essential requirements of a partnership include:
an agreement signed by the parties to carry on the business jointly or on behalf and earn and share the profit. Liability of all the partners is joint and unlimited in the partnership (except specific limited liability partnership) for all the debt of the business or firm i.e. private assets of the partners can be disposed for paying the debts of the business. Different sections of Partnership Act deal with liability of the partners in different circumstances and situations. Amongst all these sections, Section 28 deals with the Liability of Holding Out.

Types Of Partners[2]
There are many different kinds of partners in a partnership of a business or a firm according to how they work (participation) and their role. Some of these kinds of partners are:
  1. Active or Managing Partner:

    He is the key partner who takes active role in all the business and conduct of the firm. He actively involves himself in all the matters and even sometimes act on behalf of the other partners. He if retires, has to compulsory give a general public notice of his retirement for he is most known of as a partner or otherwise he will continue to be held liable for the acts/conducts/transactions/deals of the firm made by the other partners.

  2. Dormant or the Sleeping Partner:

    He is the most inactive partner of the firm. He never takes interest in the works of the firm and hence is even not known to the customers or clients that he too is a partner of the firm. He has just made the investment in the firm and shares the profits and losses of the firm and agrees and is bounded by the activities of the other active partners. Such a partner if has remain such a dormant partner for a long time then after his retirement a public notice is not necessary to prevent him from the liability by holding out as he himself by his acts is absolved. But if his existence and participation was known to some customers or suppliers for that matter, a notice must be given to them or he will be liable by holding out to such persons who believed him to be a partner.

  3. Nominal or Ostensible Partner:

    Such a partner is neither an active partner nor a dormant partner but a partner who does not shares capital or profits with the firm but lends his name to be used with the firm’s name. He does not have active interests and does not take active part in the decisions but is liable to the outsiders as an actual partner only. He too if wants to retire must give a public notice or could be liable for the later acts of the other partners.
     
  4. Partner by Estoppel or Holding out:

    If a person by his act or omission gives an image to the third party that he is a partner to the firm he is a partner by estoppel. He is a partner by holding out if the company represents him as its partner and the person knows it and the third party believing on the fact acts in good faith upon the belief. Such partners are liable to the third party are Section 28 of the Partnership Act, 1932.
     
  5. Partner in profits only:

    A person if agrees and deals with the partners/ firm that he will share only the profits of the firm and not the losses then he is a partner in profits only.
     
  6. Minor as a Partner:

    A minor cannot make an agreement and hence cannot become a partner like a major before he attains the age of 18 but he can be “admitted to the benefits of the partnership.”[3] He will share all the profits of the firm and can have access to the accounts of the firm for inspection but cannot sue the partners for the profits while remaining in the firm. He will have limited liability based on his shares in the firm and his personal property or sources could not be accredited with the firm. But once he attains the age of 18, he has 6 months to decide whether he wants to remain the partner or wants to discontinue the same. If he accepts then he will become a partner like all others and will also be liable like al others and if not, he must issue a general public notice of discontinuing or he would be assumed to be a partner and hence could be held liable for the conducts of the firm.
     
  7. Other Partners:
    There are various other partners in partnerships. A secret Partner: someone who does not wants his relationship of being a partner to be disclosed to the public but when if it happens, he becomes liable for the acts of firm to the public. Outgoing Partner: who voluntarily retires from the firm without dissolving it but is still liable for the deals/acts of firm that were signed before his retirement. Limited Partner: who is liable only up to a limit that is set according to the shares he has invested but such a partner is found only in a limited partnership and not in general partnerships.

Types of Partners[2]

Liability of Holding Out

Section 28 of the Partnership Act, 1932 is as:

  1. Anyone who by words spoken or written or by conduct represent himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.[4]
     
  2. Where after partner's death the business continued in the old firm-name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.[5]
Doctrine of holding out basically refers to an act or omission of the act which led others to believe that the person is a partner of the company and has authority and hence in this faith they made an agreement while in actual he does not have. Hence in such cases section 28 states that if a person has represented himself as a partner of the business and the other party had made some transaction in this faith, he cannot now go back and hence is estopped to be liable as a member as he presented himself.

This partner by holding out is therefore liable to compensate and make good the loss the third party, whom he induced by being misrepresenting himself as partner, has suffered due to him but does not by anyway gets a right of being a real -partner in the firm.

Example:
A introduced B as his partner to C. And B even after knowing that he is not a partner let A misrepresent him and C believing on this fact make a deal or transaction with A. B now hence cannot get back and will be liable in the capacity of being a partner (though he is not) by estoppel and will be liable by holding out to C.

How Is Liability Of Holding Out Different From Law Of Estoppel In Partnership

A partner by estoppel is almost similar to a partner by holding out though sometimes it is differentiated on a small point. A partner by estoppel by his action represents himself as the partner of the business or the firm and hence they cannot latter escape from the liability as a partner to the person who acted on their representation.[6]

In case of liability by holding out it is the firm or business that allows and lets the person to misrepresent himself as the partner and the third party to believe on the fact.[7] But this by no means, means that the person can be a partner of the firm or business but will only be liable as a partner for his misrepresentation for the transaction that resulted because of his act/omission. Moreover, the doctrine of liability of holding out has three exceptions to it whereas there lies nothing such in a partner by estoppel.

Sometimes, the two words are interchangeably used and is said, by law of doctrine of holding out a partner is held liable by estoppel by preventing him from going back from his representation that he has made to the third party.

Essentials Of Holding Out

There are two main essential ingredients or elements that are required to hold a person liable as a partner by doctrine of holding out. These main requirements are in itself interpreted or understood from the Section 28 of Partnership Act, 1932. The two essentials are:
  1. There Must Be A Representation

    There must be an express or implied representation by the person to the third party which makes the third party believe that he is a partner of the firm/ business. The representation can be oral or written or implied by the conduct. The representation can be made by the person himself showing him expressly as a partner or by letting the firm/business to represent him a partner by omitting himself from stating the true facts.

    Porter V. Incell[8]

    The defendant in this case was held liable by holding out as his conduct represented that he was a partner in the business. The defendant gave a loan of some large amount to the other defendants for establishing a farm. He used his personal influence to reduce the rate of interest and showed deep interest in the business. Moreover, he was mostly found on the land and received the parties and looked into the business. The plaintiff supplied building material of the farm to the defendants under the impression that he too was a partner and hence sued him. The court held the defendant liable by holding out as he by conduct represented himself a partner.

    In the case of Martyn v. Gray[9], the defendant was held liable by holding out as he let the third party believe that he was a partner by remaining silent when the business/firm itself misrepresented the defendant as a partner.
     
  2. Knowledge Of Representation And Acting On It In Good Faith

    The second important essential requirement is knowledge of the representation (basically misrepresentation) to the plaintiff. The plaintiff who is making the defendant liable must have knowledge of the representation and has acted on it (to make the deal or the transaction) believing on the fact.
To make the defendant liable it must be proved that either he himself represented himself as a partner of the firm to the plaintiff or otherwise has made such public representation by act or conduct that makes a person think that he too is a partner in the business.

If the plaintiff has believed on the representation and fact and has acted on it in good faith, it is immaterial whether the defendant knows it or not, he can be charged and is liable to the plaintiff by holding out as a partner. But if the plaintiff has not heard about any such representation or if heard and did not believe it to be true or real or did not act as a result of this representation then he cannot charge the person and he cannot be held liable.

Thus, such a representor is liable to anyone whom he represented himself as a partner and they gave credit to the firm/business after believing him.

Smith V. Bailey[10]

It was held by the court in this case that the defendant is liable as a partner by estoppel or holding out only on account of credit given to the firm or the transaction made by the plaintiff (third party) in the faith of representation and does not extends for any other tort or civil wrong committed by or on behalf of the firm.

Important Case Laws
There are various landmark and other important case laws and judgements on liability in a partnership. Amongst these, many derive their interpretation from Section 28 (Liability of holding out) of Partnership Act, 1932.

Some of the important case laws are:

Scarf V. Jardine[11]

Facts:
Scarf and Rogers were two partners of the firm. They conducted the business smoothly but a little latter, Scarf retired. Beach joined Rogers and replaced the retired Scarf and the business continued as it was. There was no public notice made of Scarf being no longer a partner or his retirement neither any official notice was circulated to recognize Beach as a new partner.

The whole change was left internal and was not informed to the customers or other suppliers, etc. and was not made public or conveyed to any other person. Jardine was an old supplier to the company and supplied the ordered goods without knowing about the change of partners. He came to know about this later when he thought to sue the company as they did not pay him dues for his goods. He sued the new company which later went bankrupt and hence could not pay him. So, Jardine later sued the earlier partner Scarf.

Judgment:
It was held that Scarf was not liable to pay the dues to Jardine. The court said that Jardine had a right to sue the company/firm along with Scarf in the first instance itself as he was unaware of the new firm (partners) when he had made the deal of the goods but later when he comes to know about the changed partners and still chooses to sue the new firm, now he cannot say that he was not aware of the change. Had he sued Scarf in the first instance, Scarf would have been liable as Jardine was unaware of him being retired and hence has supplied goods under the impression of Scarf being a partner.

The court held that a novation of contract may either involve same parties and change in contract or same contract and change in parties. And in the present case, an implied agreement is made as Jardine after knowing about the change of the partners chooses to sue the new firm (Rogers and Beach and not Scarf) and hence he stays on the part of same contract with different parties and hence looses his right to sue Scarf (a retired partner) or the older firm for that matter as it will be against the Partnership Act.

Tower Cabinet Co…Ltd. V. Ingram[12]

Facts:
Mr. A.H Christmas and Mr. Ingram made a plan to start a business of household furnishers together as partners. They named their firm “Merry’s” and hence worked as partners under the same name. They worked for some years together but after sometimes Mr. Ingram decided to leave the business and withdraw his partnership. He told this to Mr. A.H Christmas and asked him to tell this to all the suppliers.

Further, he asked A.H Christmas to either rescind the contracts he had made or inform those parties that he is no longer a partner to the firm. Moreover, for the next long time he had no relation with the business except A.H Christmas paid him in instalments his share of the partnership for the time they were partners. The official papers of the firm/company had written Merry’s and then A.H Christmas and Ingram written below but after the withdrawal of partnership by Mr. Ingram the name Merry’s continued to be existed but instead of the names of both the earlier partners, the name of only Mr. AH Christmas appeared along with the word Director and his signature.

After the partnership had ended, the plaintiff and the firm signed an agreement where plaintiff (Tower Cabinet) agreed to supply or deliver certain goods (6 suits of furniture) for certain amount. By mistake the official page on which the agreement was drafted was the earlier page which had the name of both the partners written on it below Merry’s. The firm failed to pay the dues to Tower and Co. and hence sued them and Mr. Ingram too in the capacity of him being a partner.

Judgment:
The court looked into the facts and held that Mr. Ingram was not liable in any condition in the present circumstances.
First reason was that though a public notice was not executed saying that Mr. Ingram is no longer a partner but he clearly mentioned this to A.H Christmas and had asked him to notify this to all the associated firms and that he will not be a partner to any future contracts. He in no way represented or tried to represent himself a partner of the firm nor had any knowledge that he was represented as a partner by the firm.

Secondly, mere negligence of the current firm in drafting the agreement on wrong paper cannot make Mr. Ingram liable as he himself neither represented himself as the partner of the firm had a knowledge that he was represented as a partner to a third party. Mr. Ingram was completely unrelated to the business and transaction and only mention of his name cannot be a reason for the third party to sue him.

Bevan V. National Bank Of Ltd.[13]

Facts:
Mr. B had a business running with the name MW and Co. and the manager of the business was Mr. MW. He looked after all the business documents and cheques of the payments from the banks. The plaintiff sued the company to recover the money for the goods he had supplied and for the suit he charged both Mr. B and Mr. MW. Mr. MW contended that the name of company was MW but he was not a partner and hence should not be held liable.

Judgment:
The court held the defendant (Mr. MW and Mr. B) both liable. Mr. MW was held liable by holding out as a partner as the court said, when the name of the company has the name of the manager and the manager is active and plays key role, it can be implied that he is a partner and hence in the current case, he too is liable for the credit given by the plaintiff in faith of Mr. MW as partner for he had let the public representation be made (even if unintentionally) that made the plaintiff believe that he is the partner. Mr. B contended that for the same reason Mr. MW should be held as sole owner and he should not be held liable but the court said that Mr. MW can only be held liable as a partner by holding out having name in the company’s title does not give the proprietorship of whole business but a position of partner of the company.

Farra V. Delfinne[14]

Facts:
This is a landmark case where a major question arose before the court. The question was to ascertain that a distinction must be created between the notorious partners and the profoundly secret partners. In the current case, Todd and the defendant were the partners for a long time and the plaintiff did business with them. But since a year the partnership has been ended but the plaintiff continued the business before as well as after with same relationship. He was not aware of the end or dissolution of the partnership and that he was now doing business with Todd only. Hence, when not paid of the dues he sued Todd along-with the defendant though the contract for which he sued was made after the dissolution of the partnership.

Judgment:
The court gave the judgement that: in cases of notorious partnerships if the dissolution has taken place before the partnership but has not been conveyed to the third party by any actual notice, the defendant will be liable; if some general public notice is given which reached to the third party as well then he is not liable; if a general notice to some people is given but not the specific party then he is liable and if there is some profound secret partnership that gives the defendant some benefit from the partnership even after some general notice but no specific notice, the defendant is again liable. In the present case, the defendant was held liable as it was a notorious continuous partnership and the plaintiff was not given any notice of the dissolution of the partnership.

Porter V. Incell[15]

Facts:
The defendant gave a loan of some large amount to the other defendants for establishing a farm. He used his personal influence to reduce the rate of interest and showed deep interest in the business. Moreover, he was mostly found on the land and also received the parties and looked into the business. The plaintiff supplied building material of the farm to the defendants under the impression that he too was a partner and hence sued him.

Judgment:
The defendant in this case was held liable by holding out as his conduct represented that he was a partner in the business. The court held the defendant liable by holding out as he by conduct represented himself a partner.

Exceptions To The Rule Of Holding Out

Section 28 of the Partnership Act,1932 provides for the Liability of Holding out to sue the partner (who is not be a actual partner of the firm/business) but the doctrine is not absolute and there are some exceptions to it. The two essentials of representation and knowledge of representation and act on it in good faith may be directly or indirectly assumed to be fulfilled but there are still some exceptions where the principle or the rule cannot be applied and hence such a represented partner cannot be held liable.

The main three exceptions are:
  1. Deceased Partner:

    The doctrine of liability by holding out is not applicable to a person who is no longer alive or is dead. This because a death is in itself a notification that the person no longer exists and hence no longer a partner and so cannot be sued.

    Venkatasubbamma v. Subba Rao[16]: In this case this principle was reaffirmed that a dead person/ partner cannot be held liable for the acts or transaction/ deal done by the other partners. The heirs of the deceased too cannot be made liable for the contracts signed by the other partners after the death of the deceased but may be for the already made contracts.

  2. Insolvent Partner:

    Insolvency of a partner too is a notice by itself. A partner ceases to be a partner of the business/ firm from the date he is declared an insolvent and hence is no longer liable for any of the contracts or transactions made by other partners after the insolvency of the particular partner. Insolvency is itself a public notice and no separate public notice is needed to show the dissolution of the partner from the business to prevent him from any further liabilities by holding out.

  3. Dormant Partner:

    A dormant or sleeping partner is a partner who does not actively participates in the business or deals and can be inferred that he has not taken part in the conduct of the firms and neither the customers or the clients are aware of his role or participation as a partner. He has just made the investment in the firm and shares the profits and losses of the firm and agrees and is bounded by the activities of the other active partners.

    Such a partner if has remain such a dormant partner for a long time then after his retirement a public notice is not necessary to prevent him from the liability by holding out as he himself by his acts is absolved. But if his existence and participation was known to some customers or suppliers for that matter, a notice must be given to them or he will be liable by holding out to such persons who believed him to be a partner.

Conclusion
A person when represents himself as the partner of the firm or the business to the third party and the third party believes on the fact is a partner by estoppel or holding out. A person can become such a partner even when the company/firm represents him as their partner and the person has knowledge but does not denies to it to the third party.

Such a person becomes the partner by estoppel or holding out though not a real partner (has no rights with the firm) but becomes liable for the acts of the firm as a partner to the third party who acted in faith of the misrepresentation. This doctrine is the essence of principle of estoppel and prevents a person from going back.

The two essentials of representation and knowledge of representation and act on it in good faith must be present so as to make the person liable by holding out. Such a person will only be liable for the compensation or damage from deal made in faith of his representation and not for the other acts of the firm.

A person who had been a partner of a firm for a long time must by a general public notice convey that he is no longer a partner after his retirement or he will be continued to be held liable for the acts of the firm. But there are again 3 exceptions to this rule which are: a deceased partner, a dormant or inactive partner and an insolvent partner where a general public notice is not required as these acts in itself are enough to show that the partner is not a partner.

End-Notes:
  1. Section 4, Indian Partnership Act, 1932.
  2. Smriti Chand, 7 Different kinds of partners that are found in a partnership firms, https://www.yourarticlelibrary.com/partnership-firms/7-different-kinds-of-partners-that-are-found-in-partnership-firms/5220#:~:text=Sleeping%20or%20dormant%20partner%3A&text=A%20sleeping%20partner%2C%20unlike%20an,acts%20done%20after%20his%20retirement. (last visited on 4 September 2020).
  3. Section 30, Indian Partnership Act, 1932.
  4. Section 28, Indian Partnership Act, 1932.
  5. Section 28, Indian Partnership Act, 1932.
  6. Types of Partners in Partnership Business, https://www.iedunote.com/types-of-partners-in-partnership-business (last visited on 6 September, 2020).
  7. Manav Malhotra, Difference between partner by holding out and partner by estoppel, 28 September, 2018, https://edurev.in/question/669796/Difference-between-partner-by-holding-out-and-part# (last visited on 5 September, 2020).
  8. Porter v. Incell, 10 Cal WN 313.
  9. Martyn v. Gray, 142 U.S. 236 (1891).
  10. Smith v. Bailey, 2 QB 432.
  11. Scarf vs. Jardine, 1882 7 APP CAS 345.
  12. Tower Cabinet Co…Ltd. v. Ingram (1949) 1 KBD 1032.
  13. Bevan v. National Bank Ltd., (1906) 23 T.L.R. 65.
  14. Farra v. Delfinne (1843) 1 Ch. 236 (CA).
  15. Supra 6.
  16. Venkatasubbamma v. Subba Rao, A.I.R. 1964 AR 462

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