Indian Partnership Act, 1932 (Part VI)

TYPES OF PARTNERS

i) Partner by holding out or Partner by Estoppel.

The rule of agency by Estoppel has been extended to the case of partnership too. Holding out is merely application of the principle of Estoppel which is a rule of evidence wherein a person is prevented or ‘estopped’ from denying a statement he made or existence of facts that he makes another person believe. Holding out refers to course of action or omission that leads others to believe that one possesses an authority which in fact one does not.

Simply put, if a person represents that he is a partner of a particular firm, he is estopped from denying this representation later on.

Section 28 says that a person is held liable as a partner by holding out if:

a) he represented himself or knowingly allowed himself to be represented as a partner.

b) such representation may be by spoken or written words, by conduct or by knowingly permitting others to make such representation by words or conduct.

c) the other party on the faith of such representation gave credit to the firm.

For example, A and B are partners in a firm. Another person C manages the firm on their behalf; places all the orders, makes the payments due etc. If C places an order, A and B will have to pay for the same as they have allowed C to function as a partner and did not to inform the suppliers or the customers that C was only a manager.

But a person who is aware that C is not a partner can not sue A and B to make good losses incurred by dealing with C.

A partner by holding out is liable to the person giving credit, to make good the loss which any third party may suffer. But he does not acquire any claim over the firm. A person does not become a ‘real’ partner but he does become liable for compensation to the third party whom he induced as a partner by holding out and caused such man loss or injury. The real partners of the firm are safe unless the partner by holding out has acted on their orders or with their consent.

SCARF vs. JARDINE is an important case for the principle of holding out wherein the importance of notice of retirement was highlighted. A partner must give notice of his retirement from a firm the same way the notice of a new member to the firm is made to the public so that people know about his status or rather the absence of participation of such retiring person in the firm. Otherwise, he might be treated as partner by holding out no matter how long back he retired from the firm without notice.

Thus, the liability of a retired partner to old creditors or customers continues till a notice of his retirement is given. Similarly, the firm will also be liable for the retired partner, should just a situation arise, if the notice has not been give. It is immaterial whether the retiring partner gives the notice or the other partners.

SCARF v. JARDINE 1882 7 APP CAS 345 – 198, 371, 431 435 FACTS: A firm consisted of two partners, Scarf and Rodgers. Scarf retired and Beach joined in his place. The business was carried on as before and no public notice about the change of partners was given to the customers of the firm. Jardine was an old supplier to the firm. He supplied the goods ordered without any idea about the change. He came to know about the change when the firm failed to pay the dues and he was considering a legal action against the firm. He preferred to sue the new firm which subsequently went bankrupt. Then he sued the earlier partner, Scarf. HELD: He had a right against Scarf provided he had proceeded against the old firm and partners in the first instance itself. Now he had acknowledged the new firm, he could not reject its identity and sue Scarf. It was held that novation might involve either a change of parties with the contract remaining the same or a change in the contract between the same parties. An implied agreement is presumed from the fact that the creditor, after the knowledge of the change, has brought a suit against the new firm. Jardine knew of the change of the constitution of the firm when he sued and he chose to sue the new firm. Now he could not sue the older firm for the same cause of action as it is against principles of natural justice as well as Partnership Act.

There are exceptions to the rule established in the SCARF vs. JARDINE case as given below:

a)     Death of a partner constitutes sufficient notice by itself.

b)     Insolvency of a partner is also sufficient notice and attracts Section 42 of the Indian Partnership Act.

c)     If one has been a dormant or sleeping from beginning to end, notice can be dispensed with as neither the customers nor the clients know of his participation in 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.

In SMITH vs. BAILEY 2 QB 432, it was decided that the liability on the principle of Estoppel extends only on account of credit given to the firm and not to torts or civil wrongs committed on behalf of the firm.

ii) Dormant or Sleeping Partner

A dormant partner does not take active part in the business, but he is liable like any other partner. Likened to an undisclosed principal, the moment he is discovered to be a partner, he can be made liable. He is not required to give notice in order to absolve himself from the liability for the acts of other partners after he ceases to be a partner.

iii) Nominal Partner

A nominal partner is a partner only in name. He is not entitled to share the profits of the firm but is liable for all the acts of the firm as if he was a real partner.

iv) Sub Partner.

He comes into existence when one of the partners agrees to share the profits derived by him from the firm with a stranger. He is not a partner in law and has no rights against the firm and is not liable for the debts of the firm.

v) Working Partner

A partner, due to his special qualifications, may be assigned the management and control of the business. He normally receives a fixed amount of salary, besides his share in the profits. For all his acts, the other partners will be liable to third parties.

vi) Incoming Partner

He is a person who is admitted as a partner in an already existing firm with the consent of all the existing partners as under Section 31. He is not liable for any act done by the firm before his admission. Where he specifically agrees to bear the past liabilities, he will be liable to the other partners for the same. But third parties cannot hold him liable as there is no privity of contract between the new partner and the creditors.

vii) Outgoing or retiring Partner

A partner who leaves a firm in which the rest of the partners continue to carry on the business is an outgoing partner. A partner can retire by the consent of all the partners (Section 31), by agreement between the partners (Section 3) and by notice as per Section 32, by death (Section 35), insolvency (Section 34) or by expulsion under Section 33.

He has to retire as per Section 36(1). He is liable to the third parties for all the acts of the firm until public notice is given about the retirement. Such notice can be given by the outgoing partner himself or by any member of the new firm. He does not cease to be liable for debts and obligations of the firm incurred before his retirement. He is also liable to a third party for transactions of the firm begun but unfinished at the time of his retirement. However, Section 36 also acknowledges a retiring partner’s right to compete as long as he:

a)     does not use the name of the firm for the firm from which he has retired.

b)     does not represent that he is working for the firm from which he has retired.

c)     does not solicit the clients of the firm from which he has retired.

He may be discharged from any liability to any third party for the acts of the firm done before his retirement if it is so agreed with the third party and the partners of the reconstituted firm. Such agreement may be implied from the course of dealing between the firm and the third party after he had knowledge of the retirement.

Section 33 further provides that though a partner may retire, he cannot be expelled unless such a power is conferred by the contract between partners and exercised in good faith. Grounds of expulsion in the contract can include, committing a criminal act, becoming insolvent, not investing the required share in the firm or causing loss to the firm die to grossly negligent act. A retiring partner is also entitled to a share in the subsequent profits if his account has not been finally settled as per Section 30 of the IPA. In case of death, his legal representatives have a right to the same.

Section 38 says that the continuing guarantee by the outgoing partner given to the firm or a third party can be revoked with respect to future transactions in the absence of a contract to the contrary.

viii) Minor as a partner

Partnership arises of a contract and minors are deemed incompetent to contract as per Section 11 of the Indian contract Act, 1872. Thus, a person domiciled in India under the age of 18 years or 21 years if covered under Guardianship Act, can not enter into a partnership. In Mohribibee vs. Dharmodas Ghose [1903] ILR 30 CAL 539, it was held that a minor cannot enter into a contract and minor’s contract is void.

However, if all the partners agree, a minor may be admitted to the benefits of an already existing firm. There can be no partnership firm with just one adult and all other partners being minor.

A minor does not become a full fledged partner. He is not personally liable; only his share in the partnership is. As per Section 30, he

a) has a right to such share of the property and of the profits of the firm as may   be agreed upon by the partners.

b) may have access to and inspect and copy any of the accounts of the firm. Since the word used is ‘may’, it seems that right of minor to inspect accounts can be restricted by agreement among partners. Trade secrets of the firm are, however, not accessible to a minor.

c) has a share in the property and profits of the firm and therefore, these are liable to the acts of the firm but the minor is not personally liable and neither is his private property liable.

d) has no right to file a suit against the other partners for accounts or for payments of his share in the profits or property of the firm while he continues to be a member. He can do so only when he has or is the process of severing      the connection with the firm.

e) may file a suit for severing his connections with firm and his share will be determined by the valuation according to the principles laid down in Section 48 for making accounts of a dissolved firm. This severance can be effected by a guardian on behalf of the minor. If the firm dissolves, the share of the minor will determined along with the share of the other partners.

f) can at any time within 6 months of attaining majority or of him obtaining the knowledge that he has been admitted (whichever is later) give a public notice that he has or he has not elected to become a member of the partnership. This proceeds on the presumption that a minor may not actually know that he has been admitted to the benefits of a partnership and gives him the right to elect whether he wants to be a partner or not. Failure to give notice within 6 months will give rise to the presumption that he is a partner in the firm.

During the six months, the position of the minor remains the same i.e., a minor admitted to the benefits of the partnership but without any personal liability.

g) may have his share in the firm attached for the acts of the firm.

h) may be liable for holding himself out as a partner despite the fact he elected not to be a partner after attaining majority.

i) During minority, the privilege of minority or infancy can be used only as a shield and therefore, a minor is liable under tort.

j) If a minor does decide to become a partner after attaining majority, he will become personally liable to third parties for all acts of the firm done from since he was first admitted to the benefits of partnership. The share in property             and profits he was entitled to as a minor will continue when he has elected to be a partner.

k) If a minor decides not to be a partner, his rights and liabilities (as those of a minor in benefits of partnership) will continue till the date of his public notice of his decision. His share will not be liable for any act of the firm after the   date of the notice and he can sue for his share in the property and profits.

If he elects to be a partner or if he fails to give a public notice that he does not elect to be a partner, he will be liable for the debts of the firm contracted since the time he was admitted to the benefits of the partnership.