Partner by Estoppel or Holding Out

Introduction

Under partnership law, a person may be held liable as a partner even if they are not actually a partner. This happens when they represent themselves, or allow themselves to be represented, as a partner. Section 28 of the Indian Partnership Act explains this principle.

Meaning / Definition

Partner by estoppel or holding out refers to a person who is not a real partner but is treated as one because of their representation to others. Such a person becomes liable to third parties who rely on that representation.

Modes or Types

Essential Conditions (Section 28(1))

Representation as Partner

The person must:

• Represent himself as a partner by words (spoken or written) or conduct (behavior), or
• Knowingly allow others to represent him as a partner

This may be:

• Active representation (direct statement)
• Passive representation (remaining silent when represented)

Reliance by Third Party

• A third party must act based on such representation
• The third party must give credit to the firm believing the person is a partner

Position of Retiring Partner (Section 28(2))

• If a retired partner’s name continues to be used
• And no public notice of retirement is given
• The retired partner remains liable to third parties who believe he is still a partner

Exceptions to Holding Out

Death of Partner

• Use of deceased partner’s name does not create liability
• Legal heirs are not liable for acts after death
• No need for public notice

Insolvent Partner (Section 34)

• After insolvency, the partner’s estate is not liable
• No need for public notice of insolvency

Important Case Law

Martyn v. Gray

A person who allows himself to be represented as a partner and remains silent is liable to third parties who act on that belief.

Distinction / Comparison

Actual Partner vs Partner by Holding Out

• Actual partner → real member of firm with rights and duties
• Holding out partner → not a real partner but liable to third parties
• Actual partner has internal rights; holding out partner does not

Practical Example

A introduces B as his partner to C. B remains silent.
C supplies goods on credit believing B is a partner.

• B becomes liable as a partner by holding out

Summary

• A person may be treated as partner even if not actually one
• Liability arises due to representation and reliance
• Both active and passive representation create liability
• Retired partner remains liable if no public notice is given
• No liability in case of death or insolvency
• Holding out protects third parties who act in good faith