In a Telnet connection, there are two types of data passed between the client and the server: actual text, and negotiations about which Telnet extra features to use.
PuTTY can use two different strategies for negotiation:
The obvious disadvantage of passive mode is that if the server is also operating in a passive mode, then negotiation will never begin at all. For this reason PuTTY defaults to active mode.
However, sometimes passive mode is required in order to successfully get through certain types of firewall and Telnet proxy server. If you have confusing trouble with a firewall, you could try enabling passive mode to see if it helps.