This article is written by Satyanshu Kumari. This article provides details of the doctrine of holding out under the Partnership Act, 1932 and Limited Liability Partnership Act, 2008, with the help of different case laws and illustrations to make it understandable.
This article has been published by Rachit Garg.
Table of Contents
Introduction
The term “holding out”, is not a mere concept, but it is the application of the doctrine of estoppel. By going to the definition of the doctrine of holding out, it means that any person who represents himself to another person that he is the partner of some XYZ Firm or even allows the others to represent him as the partner and the other person believes in him, such person shall not be deprived or estopped from his representation. Let’s suppose: Mr Arun represents to Mr. Ram that he is a partner of LK Firm, and Mr. Ram, believing in him enters into some transaction, then upon default of payment, Mr. Arun is estopped from denying this representation that he is not the partner of the firm.
The concept of holding has been discussed in more detail under Section 28 of the Indian Partnership Act, 1932 and Section 29 of the Limited Liability Partnership Act, 2008. The similarity between both these sections under these Acts is that they hold a person liable by holding out if given conditions are fulfilled by them.
Essentials of the doctrine of holding out
There are two essentials of the doctrine of holding out, these are as follows:
- Representation
- Knowledge of representation
Representation
When a person voluntarily represents to other people, either by words, in written, or spoken, or by conduct, to be the partner of any firm, he is called a “partner by estoppel”. The concept of holding out is applicable when a person knowingly represents or permits himself as the partner of the firm and does not deny it at the appropriate time. When another person represents a person as a firm’s partner and allows the same to happen, he cannot deny the same afterwards. This means that the person himself represents or causes others to represent himself as a partner of the firm, may be held liable for the losses incurred by the third party which acted in good faith on such representation.
This is explained with the help of an illustration below:
- Mr. A had given a loan to Mr. D, to establish a cattle business. Mr A had a very profound interest in the business, and he secured a lease for the farm premise using his contacts and was always available to accommodate the guests and their requests. Mr B was the person who supplied all the materials required to build the business, and he was under the impression that Mr A was the partner of the firm. In this situation, Mr A is liable as a partner by holding out by way of his actions and not by words. The illustration stated is the facts of a landmark judgement in the case of Porter v. Incell (1905).
- Where A introduces B to C as his partner, where he is the partner and B stands there silently, A will be held liable by holding out.
Mode of representation
Representation can be made in two ways:
Express or Direct: The representation can be made through spoken or written words or by the person’s conduct. For example: Suppose A told B that he is a partner of ‘XYZ and Associates, where the fact is he is not the partner of the firm, this will amount to direct representation and A can be held liable.
Implied or Indirect: It means that when a person knowingly lets his name be used by the firm for use in the name, title, or signboard of the firm, and he does not repudiate it within a reasonable time. For example: Mr. A allowed Mr. H to use his name as the title of the firm as an ‘A & H Associate’ indicating himself to be the partner of the firm, but in fact, Mr. A was not the partner of the firm. It was held that he would be liable to the third party who acted in good faith on such representation.
Bevan v. National Bank Ltd.(1906)
Facts of the case
In the case of Bevan v. National Bank Ltd.(1906) 23 T.L.R. 65, Mr. M was Mr. A’s business manager. But the business was carried out in the name and style of ‘M and Co.’ The plaintiff who used to supply goods to Mr. M sued them for the recovery of the money, and he sued Mr. M for the money as one of the firm’s partners. Mr A contended that he was not liable since the business of the firm was carried out in the name of Mr M.
Held
The court held that Mr M as well as Mr A both are liable and also laid down that where a person carries any business in the name of an individual with the addition of the word “and Co” and employs that individual as the manager of the entire management of the business, that does not amount to holding out that the person is the sole owner of the business. The court held that Mr M is also liable since he permitted the use of his name in the title of the firm, which makes him one of the partners of the firm and was also responsible to anyone who gives credit to the firm on that representation.
Acting on representation
The person making the representation must have the full and complete knowledge of his actions. The plaintiff who is making the defendant liable must know the representation and have acted on it in good faith. If the plaintiff wants to hold the defendant liable, the plaintiff has to prove that the defendant has himself or by his conduct makes the person think that he too is the partner of the firm. If the plaintiff, after such representation, believes and acts upon it in good faith, the fact that the defendant has the knowledge of it or not becomes immaterial, and the defendant can be held liable to the plaintiff. If there is no representation to the plaintiff, or there is no representation to his knowledge, his rights to sue that person making such representation does not arise.
In the case of Smith v. Bailey, the court held that to make the defendant liable as a partner by estoppel or holding out specifically due to the credit extended by the firm of the transaction made by the plaintiff in reliance on the representation. The liability does not extend to other torts or civil wrongs committed by or on behalf of the firm.
Retirement of a partner and application of the doctrine of holding out
When a partner decides to withdraw his partnership with the consent of another partner or as per the provisions of the partnership deed or by providing notice to the other partners about his retirement is termed as the retirement of the partner. Section 32 of the Partnership Act, of 1932, states about the retirement of a partner.
Sub-Section (1) states that a partner may retire with the consent of all the partners of the firm, under an express agreement by the partners or where the partnership is made on the will, by giving the notice in writing to all other partners of his intention to retire. Further, Sub-Section (2) states that the retiring partner may be discharged from any liability to the acts of the firm done before the retirement of the partner by an agreement made by him with the third party and reconstituted firm, such agreement may be implied in the course of dealing between such third party and reconstituted firm after he knew the retirement. Sub-Section (3) states that a retired partner and other partners of the firm continue to be liable as the partner to the third party for any act done by them which would have been constituted as the act of the firm if done before the retirement of the partner until public notice is given of the retirement.
Provided that the retired partner is not liable to the third party who deals with the firm without the knowledge that he was the party.
Sub-Section (4) provides that notice under sub-section (3) may be given by either the retiring partner or by any partner of the reconstituted firm.
Liability of a retiring partner
Section 32(2) of the Partnership Act, of 1932, states that every partner shall be liable for all the acts of the firm done while he was the partner of the firm. Any kind of liability has arisen during his being a partner, such liability does not come to an end by his retirement, and he shall be liable for the liability for the debts contracted before his retirement. A retiring partner may be discharged with the liabilities to any of the third parties for the acts done by the firm before his retirement by an agreement made by him with the third party and the partners of the reconstituted firm, and such agreement shall be implied by a course of dealing between such third party and the reconstituted firm after he knew about such retirement.
Scarf v. Jardine (1882)
Facts of the case
In this case, Scarf and Rogers were two partners of a firm. They conducted their business smoothly, but after some time, Scarf retired and Beach joined Rogers and continued with the conduct of the business as it was. No public notice was issued concerning Scarf being no longer a partner of the firm, and no official notice was released that Beach had joined as a partner in place of Scarf. Since the whole change was internal, no one was informed, neither the customer nor the suppliers. Jardine was one of the old suppliers of the company and supplied ordered goods without the knowledge of the change that had happened in the company. The new company was not able to pay him the dues, so when he sued the company, he came to know about the changes that took place. Since the company went bankrupt and could not pay him the dues left, Jardine sued Scarf for the recovery of the money.
Held
The Court held that the retiring partners must give notice of their retirement from the firm in the same manner as a notice of the appointment is given so that the people who are associated with the firm can get to know about their status concerning the firm. If not done so, he might be treated as a partner of the firm by holding out no matter how long back he retired from the firm, without notice. The court in this case held that the notice should be given by either the retiring partner or any of the firm’s existing partners. Unless and until such notice of the retirement is given to the old customers or the creditors, the firm will be liable for the acts of such retired partners.
A person who is not a partner of the firm may be liable to the third person, upon the ground that he has represented himself out to the world or permitted others to represent himself, and is therefore estopped from denying the same, as against those who have in good faith dealt with the firm. A partner of the firm will be liable by way of holding out to the person who is giving him the credit, and to compensate for the losses suffered by the third party. He does not acquire any claim over the firm and is not a real partner, but he will be liable for the compensation to the third party whom he induced as a partner by holding out and causing him to suffer any loss or injury due to such representation.
It also must appear that the person dealing with the firm believed and had a reasonable right to believe that the party he seeks to hold as a partner was a firm member and that the credit was to some extent induced by this belief. The most important part is that the plaintiff should have acted in the faith of the representation, and he incurs the liability on this representation. It is immaterial that the defendant did not have any knowledge that this representation had reached the plaintiff. In the present case, the plaintiff did not know about the representation, he did not know the real truth, in such cases, no liability for holding out will arise.
In cases where the person is sought to be charged as a holding out, his representation by way of words or conduct, other party’s belief, or transaction done in good faith with that belief, all are questions of facts.
Effect of the doctrine of holding out
When the doctrine of holding out is made applicable, the effect of it is on the person who represents himself directly or indirectly to be a partner of a firm is made liable as a partner to all such persons who have faith in his representation and have given credits to the firm or entered into the transaction with the firm. However, that person cannot claim any right in the firm’s property and his rights will be limited to the representation only.
In English law, the partnership by holding out is referred to as an apparent partnership instead, and the legal provisions in both India and the UK are very similar. As a matter of law, to raise any issue under the doctrine of holding out, firstly, the representation of the person as the partner of the firm should be there, secondly, the plaintiff should not know the same, and the act should be based upon that knowledge has to be proved. And lastly, the damage to the plaintiff must be established, to hold the person liable under the doctrine of holding out.
Provisions related to the doctrine of holding out
The concept related to the doctrine of holding has been provided under Section 28 of the Partnership Act, 1932, as well as under Section 29 of the Limited Liability Partnership Act, 2008.
Doctrine of holding out as per the Indian Partnership Act, 1932
Section 28 of the Partnership Act, of 1932, states about holding out.
Sub-section (1) of Section 28 provides that, any person by way of words spoken, or written or conduct, represents himself or knowingly lets the person believe that he is the partner of the firm, in such cases he will be held liable to anyone who in good faith believes in such representation and provides such person with credit or supplies any good, and whether the person representing himself or represented to the partner does or does not that the representation has reached to that person so giving the credit.
Sub-section (2) of Section 28 provides that: After the death of any partner of the firm, the old firm continues the business under that name or of the deceased partner’s name as the part thereof, does not make his legal representatives or his estate liable for any act of the firm done after the death of such partner.
Simply, it means when a person:
- Represents himself or,
- Allows the partners of the firm to do so, and
- Upon such faith of representation, the credit has been acted.
Then, in such a situation, the person will be held liable for the doctrine of holding out.
The doctrine of holding out as per the Limited Liability Partnership Act, 2008
Section 29 of the Limited Liability Partnership Act, 2008, states about Holding out.
Sub-section (1) of Section 29: any person, who by way of words spoken, or written, or by way of conduct, represents himself or knowingly permits or allows himself to be represented, to be a partner in a firm, will be liable to anyone, who in good faith of any such representation given credit to the limited liability partnership, whether the person representing himself or represented to be a partner does or does not know that the representation has reached to that so giving credit.
Provided that: any credit received by the limited liability partnership as a result of such representation, the limited liability partnership shall, without damage to be liable of the person so representing himself or as a partner of the firm, be liable to the extent of credit received by it or any financial benefit driven thereon.
Sub-section (2) of Section 29: after the death of the partner, if the business is continued in the same limited liability partnership, the use of that name or the name of the deceased partner shall not make any of his legal representatives or his estate liable for any act of the limited liability partnership.
Exceptions to the doctrine of holding out
There are certain situations under which the doctrine of holding out is not applicable, which are discussed below:
- Deceased Partner or when a partner dies: Death itself constitutes sufficient notice to all, and therefore, the doctrine of holding out is applicable in cases where the partner of the firm has died.
In the famous case of Venkatasubbamma v. Subba Rao (1964), it was held by the court that the death is a notice by itself, and hence the estate of a deceased partner is not liable for any act of the firm done after the death even if the business is continued by the surviving partners in the same manner and style and the place and even if his name appears in the name and affairs of the firm.
- Insolvent Partners or when a partner becomes insolvent: A partner of a firm ceases to be a partner from the date of his insolvency and his estate will be no longer liable for the firm’s acts, done after his insolvency. It is immaterial whether the notice is given or not, however, the insolvency of the partners is sufficient notice to all.
- Dormant Partners or when a partner is dormant: A dormant or sleeping partner means a partner who did not take part in any conduct of the business as a partner, neither any of the customers know about him nor any of the clients of the firm knows about his participation in the working of the firm. So long as he remains as the partner of the firm, his liability will be similar to any of the acting, apparent or ostensible partners of the firm. There is no requirement for public notice of his retirement, and it is not necessary to terminate his liability via public notice. It must be noted that if his presence in the firm was known to any of his customers, the news of his retirement must be given to them.
Judicial pronouncements
Farra vs. Delfinne (1843)
Facts of the case:
In this case, Todd and the defendant were partners for a very long period, and the plaintiff used to do business with them. They had dissolved their partnership, but the plaintiff continued to do business with them in the same manner. The plaintiff needed to be made aware that the partnership was dissolved, and only Todd was doing the business. When the dues were not paid to the plaintiff, he sued Todd as well as the defendant, though the contract for which he sued was made after the dissolution of the partnership.
Issue raised:
Is there a need to create a distinction between the notorious partners and profoundly secret partners?
Held:
In the case of the notorious partnership, if the dissolution has taken place, but is not informed to the third party by notice, the defendant will be liable, and if the general notice somehow reached the third party that the partnership has ended, the defendant would not be liable, and if the general notice is given to some specific person but not to the third party, then the defendant will be liable. If there is any secret partnership that gives benefit to the defendant, even after the general notice and not the specific notice, the defendant will be liable. In this case, also, the defendant was liable as this was a notorious partnership and the plaintiff was not provided with any notice of the dissolution of the partnership.
Tower Cabinet Co. Ltd. Vs. Ingram (1949)
Facts of the case
In this case, Mr. A.H. Christmas and Mr. Ingarm planned to start a business together with household furnishers as a partner. They worked together for several years and after some time, Mr. Ingram decided to leave the business and told Mr. Christmas and also asked him to inform all their suppliers of his withdrawal from the business. He further asked Mr Christmas to either rescind the contract he had made or inform the parties that he was no longer the partner of the firm. Mr Ingram also mentioned that for a long period, he would have no relation with the business except that Mr Christmas would pay him his shares in instalments.
After the withdrawal of the partnership, the official paper of the company or the firm continues to use the name of the company. Instead of the terms of both the partners the name of Mr Christmas appeared on the paper along with the word ‘Director’ and his signature.
After the partnership ended, the plaintiff signed an agreement with the firm where the plaintiff agreed to supply certain goods for a certain amount. By mistake, the draft agreement was the earlier paper, which had the names of both partners below the name of the firm. The firm failed to pay the dues on time, hence the plaintiff sued them, and Mr. Ingram too in the capacity of him being a partner.
Held
The court held that Mr. Ingram was not liable under any circumstance. The Court gave reasoning not to hold Mr. Ingram liable.
Firstly, though there was no public notice executed stating that Mr Ingram is no longer a partner of the firm, he mentioned this to Mr Christmas to inform all the suppliers that he is no longer a partner and will not be part of any future contracts. He in no way represented or tried to represent himself as a partner of the firm, nor did he have any knowledge that he was represented as a partner by the firm.
Secondly, mere negligence in drafting the agreement on the wrong paper cannot make Mr. Ingram liable, as he neither represented himself as the partner to the third party nor had knowledge that he was represented by a third party. Mr. Ingram is not related to the business or any transactions under the firm and merely mentioning his name cannot be the reason for the third party to sue him.
Conclusion
The partnership of holding out means when a person knowingly permits other people to represent himself to be the partner of the firm and does nothing to stop such representation at the relevant time. Under such representation the third party gives credit to the firm, the person afterwards cannot deny his liability towards the third party.
The liability of such an act is limited to such representation and cannot be unlimited. Furthermore, if the third party has the knowledge that such representation has been made and still enters into such transactions with the firm, then such a person would not be liable for the transaction.
Certain facts must be established before the law to bar estoppel will be raised, there must be, first, a holding out by the party sought to be charged and secondly, a reliance by the plaintiff on this holding out, and third, the damages to the plaintiff.”
Frequently Asked Questions (FAQ)
How is the liability of holding out different from the law of estoppel in partnership?
A partner by estoppel is almost similar to a partner by holding out, though there are some differences between them at some point. A partner by estoppel means by his action represents himself as the partner of the business or the firm, but they cannot later escape the liability as a partner who acted on their representation. But in case of liability of holding out, the firm or the business allows and lets the person misrepresent himself as the partner and the third party believing him.
What is the doctrine of estoppel?
The Doctrine of Estoppel here means that a person who gives an impression to another person that he/she is the partner of the firm/organisation by way of his conduct, behaviour or initiative. These kinds of partners are liable for all the debts of the firm because, in the eyes of other people, he is considered the partner of the firm even though he is not associated with the firm capital or takes any part in the management.
References
- https://thelegallock.com/doctrine-of-holding-out-under-partnership-act/
- https://www.wallcliffslawfirm.com/uploads/newsletter-files/2020112515365234416-Legal_Angle_-_November_2020_-_Issue_04.pdf
- https://www.inlightoflaw.com/2022/07/question-what-is-doctrine-of-holding-out.html
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