Gracy Singh
23th Nov 2023
Liability of a Partner by Holding Out in Partnership Act, 1932
1.Introduction
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 agreed to share the profits of a business carried on by all or any of them acting for all. 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 investments. This partnerships 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. (1)
2. Liability of Holding Out Section 28 of the Partnership Act, 1932 is as:
2.1. 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.
2.2 Where after partners death the business continued in the old firm-name, the continued use of that name, the continued use of that name or of the deceased partners 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.
3. Doctrine of Holding Out
Doctrine of Holding Out basically refers to an act or omission of the act which led offers to believe that the person is a partner of the company and has authority and hence in this faith they made as agreement while in actual he does not have. Hence in such cases section 28 states 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 of the firm.
4. Essentials of Doctrine of Liability of Holding Out
4.1. Representation
The person who is depicting himself as a partner of the firm should have been made a voluntary representation of the same. He is called as the partner by estoppel .
Representation can be of two types:
Express or direct This representation can be made through spoken or written words or by conduct. Example If A directly tells C that I am a partner of the firm named B and associates, when in fact he is not the partner. This will amount to direct representation and A can be held liable.
Implied or indirect It means when a person knowingly allows his name to be used by the firm (for the name, title, signboard of the firm) and does not repudiate it within reasonable time. Example A allows B to use his name in the title of the firm as B and A Firm indicating himself to be the partner, when in fact he is not the partner. He will be held liable by the third party who acted in good faith on such representation.
4.2. Knowledge of representation and acting on it in good faith
The person seeking to charge another with liability of holding out has to show that he had knowledge of the representation and he acted in good faith on such representation.
Where there is no knowledge of representation to the plantiff or if the plantiff knows the truth and is not misled by such representation his right to sue the person making such representation does not arise.
Thus, here knowledge of representation to the plantiff and his act of giving credit based on such representation is necessary for the liability of holding out to arise. But it is immaterial that the defendant did not have knowledge that his representation had reached to the plantiff.(2)
5.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.
6. Citation
1. Chaddaridhima, "Liability of a Person by Holding Out in Partnership Act 1932",available at: https://www.legalserviceindia.com/legal/article-3813-liability-of-a-partner-by-holding-out-in-partnership-act-1932.(last visited on 23th Nov 2023)
2. Abhi, "Doctrine of Liability of Holding Out in Partnership Act 1932", available at:https://thelawexpress.com/doctrine-of-liability-of-holding-out-in-partnership-act-1932 (last visited on 23th Nov 2023)
