Q.7. Explain the Doctrine of Holding out ? Explain its essentials. What is the effect of this doctrine on the following persons (i) in case of deceased partner, (ii) insolvent partner; and (iii) dormant partner ?
Ans. Doctrine Holding Out — Incorporating the Doctrine of Holding out S. 28 (1) says that any one 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, (ii) liable as a partner in that firm, to any one 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. .
Essentials of the Doctrine of Holding Out—The two essentials of this doctrine are as under —
I. Representation — It may be noted that the person sought to be charged with the liability for holding out must have represented himself to be a partner in the firm. Representation may be made either by words, written or spoken, or by conduct. An express representation takes place when a person allows his name to be used in the affairs of the firm. For Example–In the name, title or signboard of the firm.
In Porter V.v. Incell, 1905, the defendant had given loan to a person establishing a cattle farm. The defendant took such deep interest in the business that he used his personal influence to obtain lease of premises for the farm and was constantly present there receiving parties and their demands; The plaintiffs supplied building material to the firm under the impression that the defendant was a partner.
He was held liable as a partner by holding out by way of his conduct and not by his words.The liability for holding out may. also arise where a person “knowingly permits” or “suffers” himself to be represented as a partner. For Example- Where A introduced B to C as his partner, when in fact he was not so and B silently stood by, he was held liable by holding out : Marlyn Vs. Gray (1863).
2. Knowledge of Representation-The person seeking to hold another liable by holding out or estoppel must show that he had knowledge of the representation and acted on it.
In case the plaintiff has acted on the faith of the representation, liability is incurred to him and it is immaterial that the defendant did not know that his representation had reached the plaintiff. But if the plaintiff has not heard of the representation, or having heard, did not believe it, or knew the real truth or would have given credit to the firm in any case, no liability by holding out arises, because he has not been misled by the representation. .
Application of the Doctrine to Retirement Cases –When a partner retires and no public notice of retirement is given, the retired partner remains liable by holding out to those customers of the firm who have given credit without knowledge of the retirement. The customer can sue either the old firm or the new firm as constituted after retirement. But he cannot sue both. In Scarf Vs. Jardine (1882), a firm consisted of two partners Scarfand Rodgers. Scarf retired and Beach joined the firm in his place. The business was carried on under the same name and no notice of the change was given to the customers of the firm. Jardine was an old supplied to the firm. Goods were ordered of him and he supplied them knowing nothing of the change. The firm failed to pay. When he brought his action for the price, he came to know of the change and preferred to sue the new firm. The firm went bankrupt. He then sued the retired partner. It was held that he had lost his right to proceed against the retired partner..
Cases Where Doctrine of Holding Out Not Apply-Doctrine of holding out on retirement without giving public notice does not apply under the following cases-
(a) Deceased Partner –Since it was held in Venkatasubbamma Vs. subba Rao, A.I.R. 1964 AR 462, that death is a notice by itself hence the estate of a deceased partner is not liable for any act of the firm done after his death even if the business is continued by the surviving partners in the same style and place and even if his name appears in the name and affairs of the firm.
(b) Insolvent Partner – It may be noted that a person ceases to be a partner from the date of his insolvency and his estate is no more liable for any act of the firm done after his insolvency whether notice has been given or not.
(c) Dormant Partner-A dormant or sleeping partner means a partner who has never taken part in the conduct of business as partner. So long as he remains a partner his liability for the acts of the firm is the same as that of any acting, apparent or ostensible partner. But when he retires, public notice is not necessary to terminate his liability. It must, however, be noted that where his presence in the firm was known to some customers, notice of his retirement must be given at least to them.