Page 167 - DMGT407Corporate and Business Laws
P. 167
Corporate and Business Laws
Notes (vii) Liability of firm for misapplication by partners: Section 27 provides that a firm is liable to
make good the loss where (a) a partner acting within the scope of his apparent authority
receives money or property from a third party and misapplies it, or (b) the firm in the
course of its business receives money or property from a third party and the same is
misapplied by any of the partners while it is in the custody of the firm.
6.5.6 Types of Partners
There are different types of partners. A person who deals with a firm may have to ascertain, at
some time or the other (such as where the firm has made a default) as to not only who the partners
are, but also to what extent each is liable. The liability is different for different classes of partners.
1. Actual, active or ostensible partner: Such a partner is a person who becomes a partner by
an agreement, brings capital, actively participates in the functions and management of the
business and shares its profits and losses. He binds himself and other partners, so far as
third parties are concerned, for all the acts done by him in the ordinary course of the
business and in the name of the firm. Such a partner must give a public notice of his
retirement from the firm in order to absolve himself from the liability for the acts of the
other partners done after his retirement.
2. Sleeping or dormant partner: A sleeping partner is one who does not take an active part in
the business of the firm. Sometimes he is called as a financing partner as he contributes to
the capital only but does not participate in the management of the business. Such a partner
is liable like any other partner of the firm for the debts of the firm, even though his
existence is kept a secret from the parties dealing with the firm. His position may well be
compared with an undisclosed principal. But a sleeping partner, unlike other active or
known partners, is not required to give public notice in order to absolve himself from
liability for the acts of other partners after he ceases to be a partner. He is not liable for any
act of the firm after he ceases to be partner even if he does not give a public notice. Also his
insanity or any such other disability does not dissolve the firm.
3. Nominal partner: Sometimes persons lend their names and credit to the firm but neither
contribute any capital nor take active part in the management of the business. Such partners
are called nominal partners. As the title suggests, such persons are partners only in name.
His name is used as if he were a partner of the firm, though actually he is not. He is not
entitled to share profits of the firm but is liable for all the acts of the firm as if he is the real
partner.
4. Partner in profits only: If a partner is entitled to a certain share of profit without being
liable for the losses, he is known as partner in profit only. He is not allowed to take part
in the management of the firm, but is liable for all the acts of the firm.
5. Sub-partner: A sub-partnership comes into existence when one of the partners agree to
share the profits derived by him from the firm with a third person. This third person is
called a ‘sub-partner’. A sub-partner is not a partner in the eye of law and therefore, has no
right against the firm. He is also not liable for the acts of the firm nor can he bind the firm
by his acts.
6. Partner by estoppel or holding out: Sometimes a person who is not a partner in a firm may
under certain circumstances, be liable for its debts as if he were a partner. Such a person
may be either a partner by estoppel or a partner by holding out. If any person behaves in
such a way that others consider him to be a partner, he will be held liable to those persons
who have been misled and lent finance to the firm on the assumption that he is a partner.
Such a person is known as a partner by estoppel. He is not a true partner of the firm is and
also not entitled to any share in the profits of the firm.
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