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Active partner

  • An active partner is one who becomes a partner by an agreement and takes active part in the conduct of the partnership business
  • He is also called an ostensible partner
  • Such a partner has a power to bind the other partners by his act in the course of business
  • In case of retirement from the firm, an active partner must give a public notice of his retirement. If he fails to do so, he continues to remain liable for the acts of other partners, even after retirement

Dormant or sleeping partner

  • A dormant partner is the one who is neither active nor is known to the outsiders
  • He invests capital and has a share in the profits of the business
  • His existence is kept a secret from the outsiders dealing with the firm and his position is similar to that of an undisclosed principal (partner)
  • Like an active partner, a dormant partner is also liable to the third parties for all the acts of the firm whether or not his existence is known to the third parties at the time of making the contract
  • At the time of retirement, he is not required to give a public notice of his retirement

Nominal partner

  • A nominal partner lends his name to the firm as he enjoys a good reputation in the field of business. However, a nominal partner has no real interest in the business
  • He does not contribute any capital and also does not take part in the conduct of the partnership business
  • He is not entitled to share the profits of the business but is given commission or remuneration
  • As a matter of fact, a nominal partner only lends his name to the firm and his name is used in the firm as if he is an actual partner
  • He is liable for all acts of the firm as if he was its actual partner

Note: A nominal partner is known to the outside parties but does not share profits in the firm. Whereas, a sleeping partner on the other hand is not known to the third parties but shares profits of the firm.

Partner in profits only

  • A ‘partner for profits only’ is one who is entitled to a share only in the profits of the firm and is not liable for losses, if any
  • However, he shall be liable like all other partners, since the liability of partners is joint and several. So, if the firm incurs any loss and the other partners become insolvent, the third party may hold such a partner liable

Note: Such a partner is liable for all the debts of the firm, the reason is that the fact he shares profits only is an internal arrangement among the partners of which the third party may take no note.

Sub-partner

  • When a partner agrees to share his profits derived from the firm with a third person, that third person is known as a sub-partner
  • A sub-partner cannot represent himself as a partner in the original firm
  • He has no right against the original firm nor is he liable for the acts of the firm
  • He can claim the agreed share of profits from the contracting partner only

Partner by estoppel

He is a person who holds himself out to the world as a partner of a firm while actually not being so. He must have, by word (spoken or written) or by his conduct, represented himself to be a partner. He is also called an active representative. In such a case, he is stopped (prevented) from denying that he is not a partner. He is liable as a partner in that firm to anyone who has, on the faith of any such representation, given credit to the firm.

 

Example

Y represented himself as a partner in X’s business to Z in the presence of X. Y, in fact, was not a partner. Z advanced a loan to X. X could not repay the loan. Z can hold Y responsible for the repayment of loan because, Y is a partner by estoppel.

Partner by holding out

He is a person who knowingly permits himself to be addressed as a partner to the third parties, when he is not so. It is also called a tacit representation.
 
This situation generally occurs when a partner retires from the firm and a public notice is not given in the desired manner to that effect.

 

Example

When a retiring partner does not give a public notice of his retirement and the continuing partners still use his name as a partner on letter-heads, bills etc., he will be personally liable, on the grounds of holding out, to the third parties who give credit to the firm on the faith that he is still a partner.

 

Note: The principle of holding a retiring partner liable on the grounds of holding out does not apply in the case of insolvent and deceased partners and therefore cannot be extended to the estate or legal representatives even though no public notice was given.

Conditions for liability on the grounds of estoppel / holding out

In order to render a person liable as a partner on the grounds of estoppel or holding out-
  • He must have made an active representation or a tacit representation
  • The other person must have acted on the faith of such representation, and given credit to the firm
  • It does not matter whether the person representing himself or represented to be a partner does or does not know that the representation has reached the other person giving credit

Note: The rule of holding partners by estoppel/holding out liable to third party is based on the principle of equity and natural justice. Such partners cannot claim any rights in partnership but only incur liability to the third parties who acted on the faith that he was the partner of the firm.

Minor partner

According to Sec. 11 of The Indian Contract Act, an agreement by or with a minor is void as he is incapable of entering into a contract, but a minor can be admitted to the benefits of an already existing firm with the consent of all the partners. This provision is based on the rule that a minor cannot be a promisor, but he can be a beneficiary in a contract.

Rules for the minor to be admitted as a partner

  • The partnership to which a minor can be admitted, should already be in existence
  • All the partners should give their consent for the admission of a minor to the benefit of partnership. Consent of just a majority would not be sufficient
  • If a minor is made a full-fledged partner under the terms of the partnership deed, the deed would be invalid not only as against the minor, but also as against the other partners

Rights and liabilities of a minor partner before attaining majority

  • A minor has a right to his agreed share of profit
  • He has the right to access, inspect and copy any of the books of accounts of the firm
  • He can file a suit for his share, if he isn’t given the same. This right is available only when he desides to severe his relationship with the firm
  • The liability of the minor partner is confined only to the extent of his share in profits and property of the firm. Over and above this, he is neither personally liable nor is his private estate liable
  • He cannot be declared insolvent
  • A minor has the right to exercise the option to leave or remain in the partnership on attaining the age of majority

Position of a minor partner on attaining majority

  • He must decide the same within 6 months from the date of his attaining majority or obtaining the knowledge that he has been admitted to the benefits of the firm, which ever date is later, as to whether or not he wants to continue as the partner of the firm by giving public notice.
  • The minor may give a public notice that he has elected to become a partner or he has elected not to become a partner in the firm, and such notice shall determine his position with regard to the firm
  • If the minor fails to give such a notice within the time specified by Indian partnership Act, it will be assumed that he has opted to become a partner in the firm and would be liable to the third parties on the principle of holding out
  • If he elects to become a partner, he is liable personally to the third parties for all the acts of the firm retrospectively, i.e., from the date he was admitted to the benefit of partnership and not from the date of becoming a major
  • His share in profit and property remains the same
  • If he elects not to become a partner, then he is liable just like a minor until the date of public notice
  • If the minor elects not to become a partner then he will not be liable neither his property would be liable for any act of the firm done after the date of notice

Note: If, after attaining majority but before choosing to become a partner, the minor (now major) represents himself as a partner in the firm, he will be personally liable on the grounds of ‘holding out’ to anyone who has, on the faith of such representation, granted credit to the firm.





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