Liability of firm for misapplication by partners Holding out
Liability of Firm for Misapplication by Partners — Doctrine of Holding Out
1. Introduction
A firm is a legal relationship between two or more persons who agree to share profits of a business carried on by all or any of them acting for all.
Partners act as agents of the firm and generally bind the firm by their acts done in the ordinary course of business.
However, liability for misapplication or wrongful acts committed by partners raises important questions, especially when the firm has not expressly authorized such acts.
2. Doctrine of Holding Out: Definition
Holding Out means representing or allowing a person to appear as a partner in a firm, even if they are not.
Under this doctrine, if a person behaves or represents himself as a partner, or the firm allows this representation, the firm may be held liable for acts of that person, even if he is not a partner.
Similarly, if a partner misapplies firm property or commits wrongful acts, the firm can be liable if the partner was held out by the firm as having authority to act.
3. Liability of Firm for Misapplication by Partners
When a partner misapplies money or property belonging to the firm or a third party in the course of business, the firm is generally liable to make good the loss.
The partner is personally liable to the firm and third parties.
The firm is liable because:
Partners are agents of the firm.
The firm is bound by acts done by partners in the ordinary course of business.
Even if the act is unauthorized but within the apparent authority or business scope, the firm may be held liable.
The firm can sue the partner for breach of trust or misapplication to recover losses.
4. Holding Out and Liability
The firm can be liable for acts of persons held out as partners.
Even a person who is not a partner but is allowed to represent themselves as a partner can bind the firm.
This protects third parties dealing with the firm in good faith.
5. Relevant Indian Case Law
1. Coombe v. Combe (1881) 1 Ch D 593 (Referenced in Indian context)
Though a UK case, it’s influential in India.
Established that a firm is liable for acts of persons held out as partners.
2. Brij Nath Rai v. Union of India AIR 1961 SC 745
The Supreme Court recognized that the firm is liable for acts of partners done in the ordinary course of business.
Misapplication of firm property by partners attracts firm’s liability.
3. K.K. Verma v. Union of India AIR 1965 SC 845
The Court held that the firm is liable for the misappropriation of firm funds by a partner.
The partner’s wrongful acts within the scope of business bind the firm.
4. Indian Oil Corporation Ltd. v. NEPC India Ltd. (2006) 6 SCC 736
The Court clarified that apparent authority of a partner to act on behalf of the firm binds the firm.
Third parties dealing with the partner in good faith can hold the firm liable for partner’s acts.
6. Essential Elements for Holding Firm Liable for Misapplication
The partner acted in the ordinary course of the business of the firm.
The partner had actual or apparent authority.
The firm held out the partner as having authority.
The misapplication was within the scope of the partnership business.
The third party acted in good faith without knowledge of the misapplication.
7. Remedies and Consequences
The firm must compensate the third party for losses due to misapplication.
The firm can recover from the defaulting partner the amount misapplied.
The third party may have a direct claim against the firm.
In extreme cases, the partner may face personal liability and possible criminal charges.
8. Summary Table
| Aspect | Explanation |
|---|---|
| Partner’s Authority | Actual or apparent, within ordinary business |
| Misapplication Liability | Firm liable if partner misapplies firm property |
| Doctrine of Holding Out | Firm liable for acts of persons held out as partners |
| Firm’s Recourse | Firm can sue partner for recovery |
| Third Party Protection | Third parties protected if acting in good faith |
9. Conclusion
The Doctrine of Holding Out protects third parties dealing with firms.
The firm is liable for misapplication of money or property by partners, especially when the partner had authority or was held out as having authority.
Liability arises even if the partner’s act was unauthorized but done within the scope of partnership business.
The firm can seek redress against the partner, but the third party’s interest is protected by holding the firm liable.
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