Indian Partnership Act - Doctrine of Holding Out , Partnership by holding out

Introduction

 Generally speaking, partners are individually liable for any liability of a firm. Is it possible that third person(who is not partner of course) can be liable for liability of firm. 

Answer is YES.

Section 28 have provision related to this peculiar arrangement.

Section 28

 It states that if a person represents himself that he is partner though he is not, and then third party acts on this representation then the person who made representation will be liable.

Take for example our famous "Chocolate Wale" trading firm in chocolate consisting of Ramesh and Suresh. If Mahesh, in some or the other way tells bank that he is also partner, and based on this Bank lends money to partnership firm, in case of default, Bank can file a suite against Mahesh as a partner.

Clause 2 deals with the death of partner. It states that when partner dies, and firm continues the business, then his legal representatives or heir will not be liable for any acts of a firm.

We will see the provision in details in essential ingredients.

Essential ingredients

Representation

There are two ways a representation could be made. Meaning saying "I am partner"

First, if person himself makes such representation to third party, like in above example Mahesh says bank that he is partner with Ramesh and Suresh.

Second, knowingly permitting someone to do such representation. For example, Mahesh's girlfriend Mahima tells a bank that Mahesh is partner with Ramesh and Suresh. Though Mahesh come to know about representation made by his girlfriend, but he didn't oppose such representation.

However mere careless by any person will not make him liable. Case in point in this regard is Tower Cabinet Co V Ingramm, in this there was partnership between two person say A and B. Partnership was dissolved and A continued the business. However old stationary material was used where name of both partners were printed. Third party thought that B is also partner and did some act. It brought suite against B also. It was stated that mere negligence cannot be a reason for partnership by holding out.

Acting on faith of representation and giving credit

Third party must act on representation given by a person and also grant credit to a firm.
Also important thing is act must be done by a entity to whom representation is made. For example Mahesh says he is partner to State Bank of India, and Bank of Baroda gives a loan to firm and then bring a suite against Mahesh for being partner by holding out, such suit will not stand


Thanks
 

Comments

  1. UnknownMay 29, 2020 at 12:31 AM

    can suit be also bought against chocolate wala i.e ramesh and suresh if yes? can chocolate wala say he was not aware about the fact about credit

    ReplyDelete
    Replies
    1. AmitMay 29, 2020 at 1:39 AM

      It Depends..!!

      If Partnership Firms knows that somebody else is representing them as partner and they remain silent, then yes suit can be bought against "Chocolate Wala" in above example. (Doctrine of estoppel comes into operation).

      However if Partnership Firm is totally unaware of such third person, then No suit cannot be bought against them.

      Delete

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