Doctrine Of Holding Out Under Partnership Act

Coverage of this Article

Key Takeaways

• Section 28 of the Partnership Act provides the provisions relating to the ‘Doctrine of Holding Out’.
• Doctrine of Holding Out is a special application of the Law of Estoppel.
• This Doctrine is not applicable in cases of torts, crimes, or wrongful conduct of a partner.
• Mandatory Public Notice has to be given in case a Partner retires from the firm, to extinguish his liability regarding the acts of the firm.
• No Public Notice is required in case when a partner dies or becomes insolvent.

Introduction

-The Partnership Act was enacted in the year of 1932. Before this Act, the Indian Contract Act, 1872 (ICA) contained the law relating to Partnerships in its Chapter XI (Sections 239 to 266). The doctrine of Holding Out, which has been discussed in detail in this article, is mentioned in Sections 245 and 246 of the ICA. Partnership Act, 1932 repealed those provisions and enacted Section 28 to deal with the concept of Holding Out. This Doctrine has been propounded to protect the interest of third parties, who might not be aware of the Constitution of a Partnership Firm with which they are dealing, and hence might be defrauded.

Doctrine of Holding Out – Explained with an example

-Suppose there are two partners in a Partnership Firmnamed ‘Milkha Traders’ – Navi and Micheal.

Doctrine of Holding Out and Law of Estoppel

-The Doctrine of Holding Out is a special application of Law of Estoppel, more specifically, of Estoppel in pais by conduct.

Section 28, Partnership Act – ‘Holding Out’

-A person must represent or cause himself to be represented, either expressly or impliedly, to be a partner in a firm.

Express Representation

-In the case of Bevan v. National Bank Ltd. [(1906) 2 TLR 65], a person X was the manager of Y’s business.

Implied Representation

-In the case of A.R. Porter v. W. Incell [(1905) 10 Cal WN 313], person A used to be constantly present on the farm of a person B. He also used to receive and entertain parties. Under the impression that A is a partner in the farm, X supplied building material to the farm. A was made liable by the principle of ‘Holding Out’.

Applicability of ‘Doctrine of Holding Out’in Torts

-The doctrine of Holding Out is strictly applicable only to cases relating to credit given to a firm.

Application of Doctrine of Holding Out

-By being a partner in a Partnership Firm, a person publicly declares himself to be an agent of the firm. So, when that person retires from the Partnership Firm, he must give a public notice declaring his retirement. Otherwise, he would stay liable by the doctrine of holding out as long as the public is under the impression that the ‘retired’ partner is still a partner in the concerned firm, and based on that belief credit is given to that firm.

Conclusion

-To conclude, it can be said that the Doctrine of Holding Out, mentioned under Section 28 of the Partnership Act, 1932 is an effective provision.

Key Takeaways

• Section 28 of the Partnership Act provides the provisions relating to the ‘Doctrine of Holding Out’.
• Doctrine of Holding Out is a special application of the Law of Estoppel.
• This Doctrine is not applicable in cases of torts, crimes, or wrongful conduct of a partner.
• Mandatory Public Notice has to be given in case a Partner retires from the firm, to extinguish his liability regarding the acts of the firm.
• No Public Notice is required in case when a partner dies or becomes insolvent.

Introduction

The Partnership Act was enacted in the year of 1932. Before this Act, the Indian Contract Act, 1872 (ICA) contained the law relating to Partnerships in its Chapter XI (Sections 239 to 266). The doctrine of Holding Out, which has been discussed in detail in this article, is mentioned in Sections 245 and 246 of the ICA. Partnership Act, 1932 repealed those provisions and enacted Section 28 to deal with the concept of Holding Out. This Doctrine has been propounded to protect the interest of third parties, who might not be aware of the Constitution of a Partnership Firm with which they are dealing, and hence might be defrauded.

Doctrine of Holding Out – Explained with an example

Suppose there are two partners in a Partnership Firmnamed ‘Milkha Traders’ – Navi and Micheal. They need a loan for the firm but their financial standing is not good. So, nobody is providing them with a loan.

They ask their friend Mewa (who has a good financial standing) to help them out. Mewa claims before a creditor named Rakesh, that he is also a Partner in ‘Milkha Traders’. Considering the good financial standing of Mewa, Rakesh loans a substantial sum to ‘Milkha Traders’.

Now, in the future, if the firm ‘Milkha Traders’ is unable to pay back Rakesh, then, by virtue of the Doctrine of Holding Out, Rakesh can sue Mewa and make liable him liable to pay back the loan, because he had represented himself to be a partner earlier, and now he cannot backtrack his statement.

Doctrine of Holding Out and Law of Estoppel

The Doctrine of Holding Out is a special application of Law of Estoppel, more specifically, of Estoppel in pais by conduct. Law of Estoppel finds its place in the Indian Evidence Act, 1872 in Sections 115 to 117. In simple words, Estoppel stops a person from saying anything contrary to their previous statements. So, if a person, X, makes a representation, inducing another person, Y, to change his conduct according to the will of X, then it can be said that X could be estopped from backtracking his representation.

An important case in this regard is Mollwo, March & Co. v. Court of Wards [(1872) LR 4 PC 419]. In this case, it was emphasized that ‘Doctrine of Holding Out’ is an application of ‘estoppel’. In this case, Lord Esher MR had explained that “If a man holds himself out to be a partner and makes a man act upon that supposition, he cannot afterward say that he is not a partner.”

Section 28, Partnership Act – ‘Holding Out’

There are two main ingredients of Section 28 of the Partnership Act, 1932:

1. A person must represent or cause himself to be represented, either expressly or impliedly, to be a partner in a firm.
2. Someone must give credit to that Firm, acting on the representation made by such person.

Express Representation

In the case of Bevan v. National Bank Ltd. [(1906) 2 TLR 65], a person X was the manager of Y’s business. All the business was carried on under the name of X & Co. Here, even though X was not the owner but just a manager, he was also held liable due to the ‘Doctrine of Holding Out’.

But, in the case of Tower Cabinet Co. v. Ingram [(1949) 1 All E.R. 1033], where one of the partners used old notepaper to order some materials, it was held that merely because the retired partner was negligent in not getting the old notepaper destroyed, it does not imply that the retired partner was permitting himself to be represented as an active partner.

Implied Representation

In the case of A.R. Porter v. W. Incell [(1905) 10 Cal WN 313], person A used to be constantly present on the farm of a person B. He also used to receive and entertain parties. Under the impression that A is a partner in the farm, X supplied building material to the farm. A was made liable by the principle of ‘Holding Out’.

Similarly, in the case of Snow White Food Products Pvt. Ltd. v. Sohan Lal Bagla (AIR 1964 Cal 209 (V 51 C 38), the defendant was found liable through the Doctrine of Holding Out, due to his being a part of the verbal negotiations and subsequent correspondence of the firm with the Plaintiff Company, even though he wasn’t a partner.

One point worth noting over here is that the apparent partner does not become a real partner by way of Holding Out. He cannot claim any rights against the firm or its members in any way whatsoever, unless and until there was some connivance between the ‘apparent’ partner and the ‘real’ partners. This was observed in the case of Hudgell Yeates & Co. v. Watson (1978 QB 451).

Applicability of ‘Doctrine of Holding Out’in Torts

The doctrine of Holding Out is strictly applicable only to cases relating to credit given to a firm. It does not apply in cases of crimes or torts committed by a partner, as those acts are personal and they have nothing to do with the representation made by an outside person.

In case of wrongful conduct by one of the partners, only the ‘real’ partners would be liable and the liability would not fall on a person who ‘seems’ like a partner but isn’t a partner in that firm.A relevant case in this regard is Smith v. Bailey [(1891) 2 QB 403 CA].

Application of Doctrine of Holding Out

1.When a Partner retires

By being a partner in a Partnership Firm, a person publicly declares himself to be an agent of the firm. So, when that person retires from the Partnership Firm, he must give a public notice declaring his retirement. Otherwise, he would stay liable by the doctrine of holding out as long as the public is under the impression that the ‘retired’ partner is still a partner in the concerned firm, and based on that belief credit is given to that firm.

It is totally up to the plaintiff to or not to include sucha ‘retired’ partner in his plaint. In the case of Scarf v. Jardine [(1882) 7 App Cas 345], the House of Lords has clarified that in a case where one of the partners in a firm is replaced by a new partner, but no public notice is given in that regard, then the plaintiff has to elect that whether he wants to sue the old firm (containing the old partners) or the new firm (that emerged after the retirement). But the plaintiff cannot sue both the old and new partners.

2.When a Partner Dies

In these cases, public notice is not required. Section 28 (2) of the Partnership Act explicitly states that, where the business of a Partnership Firm is continued in the name of the old firm even after a partner’s death, the legal representatives or the estate of the dead Partner would not be made liable.

3.When a Partner becomes Insolvent

Insolvency automatically terminates the partnership and the insolvent partner ceases to be a member of that firm once he becomes insolvent. Furthermore, insolvency is supposed to be a public fact. So, no separate public notice is required in such cases. If a person becomes insolvent, then he does not stay liable for the acts of the firm that are done after the date of insolvency.

4.When a Partner is dormant

A partner is supposed to be dormant when the fact of his being a member of a Partnership Firm is not known to the public. Since he is a Partner anyway, he stays liable for the acts of the Firm. But, upon his retirement, no public notice is required to be given. But if the fact of such a partner’s existence was known even to a few customers/suppliers, then a notice would need to be given at least to those customers/suppliers, to be on the safe side.

In Court v. Berlin [(1897) 77 LT 293], it was held that in the case of a dissolved firm, dormant partners would not be liable if a debt was taken by an acting partner after the dissolution of the firm.

Conclusion

To conclude, it can be said that the Doctrine of Holding Out, mentioned under Section 28 of the Partnership Act, 1932 is an effective provision. It has practical application for protecting the interest of third parties, who give credit to a firm believing a person, who falsely represents himself to be a partner.But the key point is that the third party must act based on the false representation and not regardless of it.The Doctrine of Holding Out is not dependent upon the requirement of fraudulent intention. Furthermore, to extinguish the liability of a retiring partner, a public notice must be given, unless he was a dormant partner.