Think of a situation wherein you are not a partner in any Partnership Firm but one day you are held liable as a partner of a Partnership Firm. Can this happen?? Answer to this is Yes. Let’s clear out how this can happen. A peculiar case: Be a Partner without being a Partner!!

 

For this, first we need to understand Partnership by holding out. It means when a person represents himself to be a partner of a firm and a third party believes in such representation, the person afterwards cannot deny his liability towards the third party.

 

Similarly, if a person is representing himself to be a partner, and the firm has knowledge about such representation but did not do anything to stop such representation. So, when a third party entered into a transaction with such person then firm would be liable for the act of such person, but the liability would only be limited to such representation and cannot be unlimited.

 

Moreover, when a person is admitted to a partnership by way of holding out, he cannot claim any rights in the property of the firm and his rights will be limited to such representation only.

 

This principle has been recognised in Section 28 of Indian Partnership Act, 1932. This section states that a person is held liable as a partner by holding out if such conditions are fulfilled:

 

1. He represented himself or knowingly allowed himself to be represented as a partner.
2. Such representation may be by spoken or written words, by conduct or by knowingly permitting others to make such representation by words or conduct.
3. The other party on the faith of such representation gave credit to the firm.

 

Elements of Partnership by Holding Out

 

1. Representation- The voluntary representation by the person who is depicting himself as a partner of the firm should have been made, though it is not necessary that the representation must be express, it can be implied too.

 

2. Knowledge of Representation- It need to be shown that he had knowledge of the representation and did act under the belief that the facts represented were true. it must be proved either that he has represented himself as a partner to the plaintiff or has made such a public representation of himself in a character as to lead the court to conclude that the plaintiff knowing of the representation and believing that the defendant to be a partner gave him credit under that belief.

 

Cases referred:

Bevan v. National Bank Ltd.

Scarf vs. Jardine

 

For easy understanding, if a person represents that he is a partner of a particular firm, and some other person carried on some transaction believing him to be a partner of the firm, then is estopped from denying this representation later on. Thus, the rule of the agency by estoppel is applicable in law related to partnership too.

 

Furthermore, it is to be noted that if a third party knew about the reality behind the representation even though he entered into transaction with such person then firm would not be liable for the transaction. So, be cautious if you represent or gets represented on behalf of any firm. This representation may put you in litigation.

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