According to the ‘Doctrine of estoppel’, mentioned in section 115 of Indian Evidence act, a person is prevented or ‘estopped’ from contradicting his previous statements made, which was believed to be true. This principle is applicable in the laws relating to partnership too. The ‘Doctrine of liability of holding out’ is an application of the principle of estoppel.
The concept of holding out has been provided under section 28 of the Indian Partnership Act, 1932 as well as in section 29 of Limited Liability Partnership Act, 2008.
Section 28 of Indian Partnership Act, 1932 –
(1) Anyone who by words spoken or written or by conduct represents 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) Where after a partner’s death the business is continued in the old firm name, the continued use of that name or of the deceased partner’s 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.
It simply means that where a person,
- Represents himself or
- Allows partner to do it ,and
- Upon the faith of this representation credits may have acted
Then, a person will be held liable on the ground of doctrine of holding out.
The term ‘Holding out’ means an action or omission which leads other people to believe that the person possesses an authority which in fact he does not. Hence according to this section, a person is estopped from denying the representation he made earlier later on.
He does not acquire any claim over the firm , but he does become liable for compensation to the third party whom he induced as a partner by holding out and caused him suffer loss or injury due to such representation. The purpose of this doctrine is to render a person liable as partner on ground of estoppel. It fixes the liability of the person representing him to be a partner of any firm.
Essentials of Doctrine of Liability of Holding Out
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.
Bevan v. National Bank Ltd.-
Mr. MW was the manager of Mr. B’s business. The business was carried on in the name of ‘MW and Co.’ The Plaintiff who had supplied the goods sued MW to recover his money as one of the partners of the firm, but B contended that he should not be held liable because the style of the firm carried the name only of MW. Court held that he was liable and laid down that where a person carries a business in the name of an individual with the addition of the words “and Co”, doesn’t amount to holding out that person as sole owner of the business. It may amount to holding out that he is a partner in the business. MW was also liable because by permitting his name to be used in the title of the firm he made a representation that he was a partner and responsible to those who had given credit to the firm on the faith of that representation.
Porter v. Incell, 1905–
Defendant had given a loan to a person establishing a cattle farm. He took deep interest in the business and used his personal influence to obtain lease of premises for the farm and was constantly present there receiving parties and their demands. Plaintiff supplied building material to the firm under the impression that the defendant was a partner. Hence, defendant was held liable as a partner by holding out not by his words but by way of his conduct.
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 plaintiff or if the plaintiff 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 plaintiff 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 plaintiff.
Application of the doctrine to cases of retirement of partner
When a partner retires but does not give any public notice of his retirement, he is held liable by holding out to those people who give credit to the firm without the knowledge of his retirement.
The notice can be given either by the retiring partner of the firm or by the existing partner of the firm.
Scarf V. Jardine (1882) is an important case which highlights the importance of notice of retirement.
Exceptions to the doctrine of holding out on retirement without giving public notice are as follows –
- Deceased partner – The death of the partner constitutes sufficient notice in itself. This was held in ‘Venkatasubbamma Vs. Subba Rao, AIR 1964 AR 462’ Thus, estate of a deceased partner is not liable for any act of the firm done after his death even if his name in the title of the firm is being used in same manner and style.
- Insolvent partner – Insolvency of partner is also a sufficient notice. Thus, an insolvent partner from the date of his insolvency is no more liable for any act of the firm done after his insolvency regardless of the public notice.
- Dormant partner/ Sleeping partner – A dormant partner is one who has never taken an active part in the conduct of a firm as a partner. He is held liable similar to the acting or apparent partner but once he retires, public notice of his retirement is not necessary in order to terminate his liability. But, notice of retirement of a dormant partner has to be given to the people who had knowledge of the presence of that partner.
Effect of doctrine of holding out
When the doctrine of holding out is made applicable, the effect of such doctrine is that the person who has represented himself directly or indirectly to be a partner of a firm is made liable as partner to all such persons who have faith on his representation and have given credit to firm or entered into transaction with the firm. But such a person cannot claim any rights in the property of the firm and his rights will be limited to such representation only.
Also, in Smith vs. Bailey, it was decided that the liability extends only on account of credit given to the firm and not to civil wrongs committed on behalf of the firm.
In English law, Partnership by holding out is referred to as apparent partnership instead, and the legal provisions in both countries are very similar. As a matter of law, to raise the issue of the doctrine of holding out, firstly representation of a person as a partner of a firm must be proved. Then knowledge of such representation to the plaintiff and his act based upon that knowledge must be proved. And at last damage to the plaintiff must be established to hold the person liable based on this doctrine of holding out.
Important Case Laws
- Snow White Food Products (p) Ltd. V. Sohanlal Bagla
Suit for recovery of Rs.13,031. Employee of the firm, Sohanlal entered into negotiation on behalf of the firm with Snow White Ltd for transferring their goods. Goods were not delivered but were turned to their own use . In a suit filed against the firm, Sohanlal repudiated that he had ever been a partner of the firm.
It was held that Sohanlal represented himself as a partner of the firm during a transaction with Snow White Ltd. His representation was acknowledged by Snow White Ltd. Therefore Sohanlal was held liable to pay Snow White Ltd on the basis of the doctrine of holding out.
- Tower Cabinet Co. V. Ingram
Christmas and Ingram carried out a partnership business relating to household furnishings under the name, “Merry’s”. Ingram retired in 1947 and the partnership was dissolved but Christmas continued to use the same name (Merry’s) for the business he was carrying on. A year later, Tower Cabinet Co Ltd. which had not previously dealt with the firm received an order for supply of furniture. The order was made with the name of Ingram appearing on the letterhead which was made without his authority. The price was never paid. Thus, the company sought to enforce it against Ingram. Ingram was not aware of the purchase.
The court held that Ingram was not liable because he had not ‘knowingly’ represented himself as a partner of the firm after the retirement. Also, plaintiff had no previous dealing with the partnership firm before and so there is no evidence that the defendant knew of the representation.
- Section 28, Indian Partnership Act, 1932
- Bevan v. National Bank Ltd., (1906) 23 T.L.R. 65
- Colonel A.R. Porter V. W. Incell,1905 Cal(154 & 155 of 1905)
- Scarf vs. Jardine, 1882 7 APP CAS 345
- K. Venkatasubbamma And Ors. vs K. Subba Rao Nuna Venkatarami, AIR 1964 AP 462
- Smith vs. Bailey, 2 QB 432.
- Snow White Food Products (p) Ltd. V. Sohanlal Bagla ,AIR 1964 Cal 209
- Tower Cabinet Co., Ltd v. Ingram (1949) 1 KBD 1032
This article has been written by Bhargavi Madhukar Mundhe, from Shankarrao Chavan Law College, Pune.