Doctrine of Holding Out under Partnership Act

Introduction

The Doctrine of holding out partnership goes back to the Partnership Act of 1890. This is also called the partnership as the estoppels. The liability of every person goes to the firm individually, but there is the formation of the third-party liability to the firm since the principle of the estoppel is applicable to the doctrine of holding out. Under the governance of the partnership Act, 1932 and the general rules and principles of the contract the partnership takes place with a contract. The doctrine of holding out is basically giving a false impression to the other person making the other person believe that the other person is still the partner at the company and holds the authority in the name of being the partner at the company and makes an agreement with the other person though he or she is not at the same position actually.

Now in such a situation Section 28 of the partnership act is considered. Under this section, it says that if a person portrays himself or herself as a partner of the company or the party or the business and the transaction take place due to the faith developed, then that person is liable for his or her actions and also estopped to be a member who is liable as he or she represented themselves. Now this person who is liable for his actions is responsible to compensate for the loss that the member has caused due to holding out. now this person who misrepresented himself will not be getting any rights as a real partner of the firm or the company. There are essentially two principles of the doctrine of holding out, i.e., Representation and the Knowledge of the representation.

There are some exceptions in the present doctrine, firstly a deceased partner case, secondly an insolvent partner and a dormant partner. Now for a deceased partner, it is not possible to hold out or act for the firm or in the firm hence this becomes an exception here. Now moving on with an insolvent partner, in this case, the partner is insolvent and is not in a condition to act for the firm hence an exception. And at last, a dormant partner, a dormant partner is like a sleeping partner who is not explicitly working or having any privileges in the firm hence he cannot actively participate for the firm there for the exception this partner comes in the vicinity since neither the customer nor the company is aware of the presence of such partner.

Ingredients of Holding Out the Partnership

In order to have the doctrine of holding out of the partnership one should represent voluntarily by misrepresenting himself as the partner in the firm, the implication is not necessary but the representation should be expressed on the individual’s part. In the case of Bevan v. National Bank Ltd. [1] there was a business carried under the name MW and Co. Now, Mr MW was the manager of the business which was owned by Mr. B. Now the plaintiff who use to supply goods to the MW who was responsible for the style sued him for the money as he was also a partner at the company and was working on the behalf of the company. But the owner of the company, Mr B argued that he should not be held liable for this since if the person is acting as an individual in the company and that individual was also responsible for all the management of the company hence this does not amount to the doctrine of holding out since MW is a partner in the company. But This amount to holding out when the business is considered since MW permitted in using his name for the title of the firm, hence he was liable. As he was a partner at the firm and had a responsibility to the ones who showed trust and faith in him on the faith of representation.

Knowledge of the Representation and acting on it in the Good Faith.

Now for second essential for the doctrine of holding out, is when the person who is misrepresenting has the complete knowledge of his actions and made the consumer believe that the actions done by him were in good faith and truth. Now in order to have the right to sue the partner, there should be a representation of the deed with the knowledge of his actions to the consumer, and if not then no right to sue arises.

In order to sue the defendant for the liability as a partner for representing himself as a partner of the firm, it has to be proved that either he was representing himself as the partner in front of the plaintiff or there was a public representation made on his part which led to the decision by the court that the plaintiff believed the defendant and gave him the credit under the same influence and faith. It is understood that if the plaintiff gave the credit on the basis of the faith established by the defendant, then it becomes immaterial that the defendant didn’t do anything without any knowledge of his actions. Now if there’s an error on the plaintiff’s part then there is no liability by holding out arises since there was no twist by the representation.

In Scarf vs. Jardine[2] for the principle of the doctrine of holding out, the significance of the notice of the retirement was pointed out. in the instant case, it was stated by the Hon’ble court that it is essential for the partner to inform or notice in time regarding his or her retirement from the company or the firm. This will make the customers aware of the situation and the status of the partner if he is involved with them in any sort of business in which they are working on the firm’s behalf. If the partner is not successful in informing about his status and continues his work then he will be held liable for the doctrine of holding out and this will also result in making the firm liable too.

Now there are some exceptions in the present situation:

1. The death of the partner can amount to sufficient notice by itself.

2. Under Section 42 of the Indian Partnership Act, comes into the picture when insolvency is considered.

3. And at last, when there is the presence of a dormant partner of the company.

Difference between Holding Out and Law of Estoppel in the Partnership

There is a great similarity between the law of estoppel in the partnership and the doctrine of holding out but it may consist of some differences too. A partner by estoppel by his action represents himself as the partner of the business or the firm and hence they cannot later escape from the liability as a partner to the person who acted on their representation[3].

In case of liability by holding out it is the firm or business that allows and lets the person misrepresent himself as the partner and the third party to believe in the fact.[4] Now as mentioned before there are certain exceptions defined under the doctrine of holding out of a partner but in the case of estoppel, there are no such exceptions mentioned. There are many instances where both the terms are used as a substitution for each other, by the law of doctrine of holding out a partner is held liable by the estoppel by preventing him from going back from the representation that he has made to the third party.

Case Laws:

1. In Ram Coomar vs. M.C. Queen[5] it was held in the instant case by the Privy council that Mrs. Donalds was the owner of the business and all the transfers made by her holds their validity. This case was about the very foundation of the Doctrine of holding out, and this was incorporated under Section 41 of the Transfer of Property Act.

2. In Sham Sunder vs. Hari Dev Bansal And Ors[6], it was about the principle of the holding out and on the evidence on record. There were some blurry and vague contentions raised by the defendant which he tried to support with unreliable evidence, and on the other hand in the meantime, the other defendant continued to deal with the customers.

3. Kanishk Trading and Another vs. Union of India[7] in this case section 25 was considered. It was said that section 25 cannot be stated to be holding out of any such promise by the government which had a basic intention of establishing a legal relationship between the party and the government.

4. Sal Steel Ltd. Vs. Union of India[8], Even if the resolution of the Government amounted merely to “the holding out of a promise that no rent will be charged in the future, the Government must be deemed in the circumstances of this case to have bound themselves to fulfill it. The court must do justice to those who seek justice by promoting honesty and should use its authority and power for good.

Conclusion

In partnership by holding out, a person intentionally represents himself as a partner of the company or the firm and acts on their name by making the party believe about his status in the firm, and the person cannot deny his liability to the third party afterward his actions are proved. Now if there’s any way involvement of the firm is proved or the firm is aware of the actions of such person and didn’t take any actions to stop such representations, then the firm will also be liable for the actions. Now, if a person is admitted by the means of holding out then that person cannot claim the rights in the property of the firm or the company.

Now moreover if the customer or the party was aware of the truth behind the representation then the firm will not be held liable for the actions since the party was aware. This present doctrine helps many customers all over from such incidents where they put their investment or credits in possession of someone who is not reliable and misrepresents himself and establish fake faith just to gain for personal gain and profit. Hence, this doctrine plays a vital role in Partnerships and even under the provisions of the Partnership Act, 1932.

[1] Bevan v. National Bank Ltd., (1906) 23 T.L.R. 65

[2] Scarf vs. Jardine, 1882 7 APP CAS 345

[3] Types of Partners in Partnership Business, https://www.iedunote.com/types-of-partners-in-partnership-business (last visited on 22 May, 2021).

[4] 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 22 May 2021)

[5] Ram Coomar V. M.C Queen (1872) 18

[6] Sham Sunder v. Hari Dev Bansal And Ors., 1999 PLR 122 509

[7] Kasinka Trading And Another v. Union Of India, 1995 AIR SC 874.

[8] Sal Steel Ltd. v. Union Of India, 2010 SCC ONLINE GUJ 13864.

This article has been written by Yashi Singh, 2nd Year B.A. LL.B Student at Maharashtra National Law University, Mumbai. 

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