An outsider dealing with a firm must know who the partners in the firm are and to what extent each partner is liable. This becomes all the more necessary when there is default by the firm. The extent of partner’s liability, to some extent, can be ascertained with reference to the type of partners they are. Hence it becomes necessary to know what are the various types of partners. They are as follows:
i) Active or ostensible partner: A person entering into partnership by contract and taking active part in the conduct of business is called ‘active’ or ‘ostensible’ partner. For all acts done in the ordinary course of business he acts as an agent of other partners, He thus, has the capacity of binding himself and other partners vis-Ã -vis the third parties for all acts done in the firm’s name and in the ordinary course of business. In the event of his retirement, he must give a public notice of his retirement in order to absolve himself of liabilities for acts of other partners done after his retirement.
ii) Sleeping or dormant partner: A sleeping partner is one who contributes to the capital of the firm and has a share in the profits of the firm. But he does not take an active part in the conduct of the business of the firm. Though the third parties may be unaware of his existence as partner, he is equally liable for all debts of the firm like an undisclosed principal. In the event of his retirement from partnership, however, he need not give a public notice.
iii) Nominal partner: A partner who neither contributes to the capital of the firm nor takes a share in the profit or takes part in the management of the firm is called ‘nominal partner’. Such a partner merely lends his name to the firm and does not have any real interest in the affairs of the firm. But he, along with other partners is liable to third parties dealing with the firm only for all the debts of the firm.
iv) Partner in profits only: If it has been agreed among partners that a particular partner shall have a share in the profit only and not, he liable for losses, such a partner is known as ‘partner in profits. Towards the third parties, however, he is liable for all the acts of the firm. Since the liability of partners is joint and several, he may have to contribute the major share if the firm bears heavy losses and other partners are not in a position to pay the debts of the firms.
v) Sub-partner: When a partner agrees to share his profits derived from the firms with a third person, that third person is known as ‘sub-partner’. A sub-partner is in no way connected with the firm. He has no rights against the firm nor does he carry any liability for the debts of the firm.
vi) Partner by estoppel or holding out: (Sec, 28): Normally a person becomes a partner only by agreement. But, for outside world, a person can also be treated as a partner by virtue of his conduct. This happens by way of estoppel or holding out. According to Section 28(1), “when a person, by words spoken or written, or by his conduct, represents himself or knowingly permits himself to be represented to be a partner in a firm, he is liable as a partner in that firm to anyone who has on the faith of any such representation gives credit to the firm.” The person so representing himself is called a partner by estoppel or holding out. For example, a renowned sportsman assumed the honorary presidentship of a publishing business bringing out a sports magazine because the other partners requested him to do so. He would be considered liable for all the debts of the firm to all those third parties who gave credit to the firm in the bonafide belief that this sportsman was a partner in the firm. Similarly, Shyam had business in the name of Ram Shyam & Co. He employed a person, whose name was Ram, as a manager of the firm’s business. The third parties dealing with the firm treated him a partner of the firm. Ram neither objected nor disclosed his true status. It was held that Ram was a partner by estoppel.
To hold a person liable as a partner by estoppel or holding out the following two conditions must be satisfied:
i) He must have represented himself to be a partner by word, spoken or written, or by his conduct (active representation), or knowingly allowed himself, to be represented as a partner (tacit representation); and
ii) The third person acting on the belief of such representation must have given credit to the firm. It is immaterial whether the person so holding himself out to be a partner is aware or not that the representation has reached the third party.
A retiring partner who has not given a public notice of his retirement; can also be held liable on grounds of holding out if his name is still being used by the other partners in the firm. It is because the third parties may continue to believe that he is still a partner. However, where in the event of death of a partner, the firm continues the business and uses the deceased partner’s name as part of the firm’s name, the estate of the deceased partner or his legal representatives cannot be held liable for acts of the firm done after his death.
