effects of non registration of partnership firm

Final word count: 5874

PROJECT WORK (Contracts- II) Effects of Non- Registration of a Partnership Firm

NATIONAL LAW UNIVERSITY, JODHPUR WINTER SESSION (JANUARY- MAY 2015)

Submitted to:

Submitted by:

Mrs. Anjali Thanvi

Divita Bansal

Faculty of Contracts- II

BBA (H), LLB (H)

NLU Jodhpur

UG Semester II (section-B) Roll No. 1164

CONTENTS

Acknowledgement......................................................................................................................4 Research Methodology...............................................................................................................5 Scope of the Project...................................................................................................................6 Introduction................................................................................................................................7 Historical Background...............................................................................................................8 Statutory Provisions on the Effects of Non- Registration..........................................................9 Suits between Partners and the Firm (S. 69(1)).......................................................................10 Suits Between the Firms and the Third Parties (S. 69(2))........................................................12 Statutory and Non- Contractual Rights:-..............................................................................12 Actions based on Tort:-........................................................................................................13 Registration of Partnership Deed:-.......................................................................................13 Effect of Change in the Constitution:-.................................................................................14 Burden of Proof:-.................................................................................................................14 Exception to the section:-.....................................................................................................14 Registration before Action:-.................................................................................................14 Set- off and Other Proceedings (S. 69(3))................................................................................14 “Other Proceedings”:-..........................................................................................................14 Proceeding after arbitration award:-.....................................................................................15 Exceptions to the Section:-...................................................................................................15 Exceptions of the Section 69 (S. 69 (4))..................................................................................16 Suits where provisions relating to Registration of firms do not apply:-..............................16 Value of suit does not exceed Rs. 100:-...............................................................................17 Other exceptions:-................................................................................................................17 Introduction of sub- section (2- a)............................................................................................17 Suit filed in Individual Capacity:-........................................................................................20 Conclusion................................................................................................................................21

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Bibliography.............................................................................................................................23

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ACKNOWLEDGEMENT

At the outset, I take this opportunity to thank my teacher and guide, Mrs. Anjali Thanvi from the bottom of my heart who has been of immense help during moments of anxiety and torpidity while the project was taking its crucial shape. Hence, I as a student am forever deeply indebted to her. Secondly, I convey my deepest regards to the administrative staff of NLUJ who held the project in high esteem by providing reliable information in the form of library infrastructure and database connections in times of need. Thirdly, the contribution made by my parents and friends by foregoing their valuable time is unforgettable and highly solicited. Their timely advice and solid supervision paved the way for the successful completion of this project. Finally, I thank the Almighty who gave me the courage and stamina to confront all hurdles during the making of this project. Words are insufficient to acknowledge the tremendous contributions of various people involved in this project---as I know “Words are Poor Comforters”. I once again wholeheartedly and earnestly thank all the people who were involved directly or indirectly during this project making which ultimately paved the way for me to complete the task of project making within the stipulated time.

DIVITA BANSAL

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RESEARCH METHODOLOGY

SUBJECT: Contracts- II TOPIC: Effects of Non- Registration of a Partnership Firm Primarily, all information furnished in this project has been taken from standard texts and authentic sources from the first and second hand legal sources. Also recent trends and developments that took place in the issue of the partnership act have also been taken into account and highlighted. Standard footnotes have been provided at appropriate places wherever needed to acknowledge the source. LIMITATION OF RESEARCH: This research project limits itself to the domain of Partnership act and its associated derivatives which in the recent years have taken exclusive developments and as a result deserves importance. Though the subject matter is very exhaustive, only significant aspects in this project have been primarily focused and highlighted. Every effort has been to keep this project error free. But still, if some errors might have crept in owing to many factors, I would gratefully acknowledge the suggestions of readers to make this project more useful and enduring to everyone.

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SCOPE OF THE PROJECT The project seeks to look at the consequences faced by an unregistered partnership firm. It will focus on the disabilities of an unregistered firm provided by Section 69 of Indian Partnership Act, 1932. It will also focus on the exceptional situations where an unregistered firm can file cases in a suit. At the end of the project, you will come to know about the state amendment which was declared unconstitutional recently. Furthermore, subsequent registration cannot cure the defects of non registration. Therefore, the whole project is trying to show the fatal consequences faced by the partners as well as the firm in case of nonregistration of partnership firm.

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INTRODUCTION The Indian Partnership Act, 1932 (the Act) was enacted by the Parliament repealing the relevant sections from the Indian Contract Act, 1872 keeping in mind the conditions and the special nature of business in India. It was thought proper to define and amend the law relating to partnership. Registration of the partnership is a very important area which has been dealt in Chapter VII of the Act, and due to its special nature, that the disabilities resulting from nonregistration came in to effect a year after the Act. Chapter VII of the Act deals with ‘Registration of Firms’ of which sections 56 to 65 deals with the procedure for registration. Section 66, relates to inspection of register, section 67 to grant of copies to ‘any person’ and section 68 with ‘rules of evidence’. The purpose of these provisions is to protect the interest of those who deal with partnership firms in various commercial transactions. Third parties who deal with a firm on its name or with a partner or managing partner as representative of the firm must be in a position to know who the partners are and what are their respective shares in the partnership, the details, if any, as to the capital investment by partners, and the details, if any, of the partnership property. That would enable them to have an idea of the competence, status and solvency of the partners of the firm. If the partnership firm does not choose to get itself registered, then the firm as well as the partners are under the disabilities which are extremely inconvenient. There is no direct compulsion but a pretty strong persuasive pressure to come on the register of firms. No member of an unregistered firm can enforce his rights under the partnership contract against either the firm or any present or past member of it, nor can the firm sue its customers on their contracts. The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non registration. It is optional for the firm to get itself registered or not. However, Section 69 puts down certain disabilities to a non registered firm which normally forces the partners the partners to get the firm registered. These are:1. Disability of firm: Unregistered firm cannot file suit for the recovery of the dues or for other matters against third parties. 2. Disability to partner: The partner of an un-registered firm cannot bring a suit for the enforcement of right against a third party or his co-partner unless the firm is registered. 3. Ability against firm and partner: The third party has full right to file suit of their dues against the un-registered firm and the partners.

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HISTORICAL BACKGROUND In order to compel partners to register their partnership firms so that all relevant information could be obtained by inspection of the register or by obtaining a certified copy thereof, a suitable legal provision is needed. The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October, 1932.1 Under the UK Registration of Business Names Act, 1916, there was a penal provision and also a provision which created certain disability in respect of enforcement of certain rights in Courts (makes it compulsory not just firms but also individuals carrying on business to register both the business names and the personal names of the parties in the form therein prescribed). However, under the Indian Partnership Act, there is no penal sanctions for non-registration (as in UK), but only a provision that creates certain disabilities in respect of enforcement of rights in Courts. 2 Under the Act, registration of firm is not mandatory. It is utterly on the will of the partners to get it registered with the Registrar of the Firm or not to do the same. The object and the reason as to why registration is not made compulsory are, in brief difficulties related to Hindu undivided family business, short lived partnership and firm in a small way of business. 3 Although there is no penalty for non-registration, yet registration becomes necessary at one time or the other, because Section 69 of the Act seriously cuts short the capacity of an un-registered firm and its partner to sue and be sued (which would prevent other parties from transacting). Business Names Act 1985 (English Act), has replaced the above the UK Registration of Business Names Act of 1916. The English precedent in so far as it makes registrations compulsory and imposes a penalty for non-registration has not been followed, as it is considered that this step would be too drastic for a beginning in India, and would introduce all the difficulties connected with small or ephemeral undertakings. Instead, it is proposed that registration should lie entirely within the discretion of the firm (or the partners) concerned; but following the English precedent, and firm which is not registered will be incapable to enforce its claim against third parties in the civil court; and any partner who is not registered will be unable to enforce his claims either against third parties or fellow partners.4

1 Section 1, Indian Partnership Act, 1932 2 Section 69, Indian Partnership Act, 1932 3 Pollock & Mulla, Partnership Act, 1sted. (1934), pg. 88 8|Page

STATUTORY PROVISIONS ON THE EFFECTS OF NON- REGISTRATION Section 69 contains the provisions describing the effects of non registration of a partnership firm. Section 69- Effect of non-registration5:(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. The sub section (1) bars any suit or action by the partner of an unregistered firm against that firm or against any other partner of that firm. (2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of firms as partners in the firms. The sub section (2) bars any suit or action by the unregistered firm against any third party. The operation of section 69 would extend to the suit in which a partner sues his co-partner or sues the firm to enforce any right arising from the contract between the partners.6 (3) The provisions of sub-sections (1) and (2) shall apply also to a claim of setoff or other proceedings to enforce a right arising from a contract but shall not affect:

4 Pollock & Mulla, Partnership Act, 1sted. (1934), pg. 167, 186-187

5 Indian Partnership Act, 1932 6 C.L.Gupta, Law of Partnership, 3rd ed., 563 (Modern Law Publications, Allahabad, 2001) 9|Page

(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm, or, (b) the powers of an official assigned, receiver or Court under the Presidency Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an insolvent partner. The sub section (3) says that the disabilities mentioned in the above sub sections also apply to a claim of set off or other proceedings to enforce a right arising from a contract. But the further sub clauses of this section contain exceptions. (4) This section shall not apply: (a) to firms or partners in firm which have no place of business in the territories to which this Act extends, or whose places of business in the said territories are situated in areas to which, by notification under section 56 this Chapter does not apply, or (b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the presidency towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882, or outside the Presidency towns, is not of a kind specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim. Sub section (4) also contains some exceptions. These were the statutory provisions of the effects of non registration of a firm contained in Indian Partnership Act. So, let’s further understand the concepts/sections one by one.

SUITS BETWEEN PARTNERS AND THE FIRM (S. 69(1)) A partner of an unregistered firm cannot sue the firm or his present or past co-partners for the enforcement of any right arising from a contract or conferred by the Partnership Act. According to section 69(1) two conditions are necessary to enable a partner to sue his copartners or the- firm. These are: 

The firm should be registered. The name of the partner suing must figure in registration.

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This difficulty may be overcome by getting the firm registered before an action is brought. But once a dispute between the partners has arisen, all of them may not sign the application form, and consequently the firm may remain unregistered. It is, therefore, advisable to have the firm registered as soon as it is constituted. The scope of this sub-section was examined by the Bombay High Court in S.H. Patel v. Husseinbhai Mohd. 7, a case where the action was between two former partners to enforce an agreement restraining the outgoing partner from carrying on in some area any business similar to that of the firm and the court had to examine whether such suit was maintainable or not as the firm was not registered. Desai, J., in this case held that here there was a new agreement as to restraint and not one arising out of the original contract of partnership. He said: "The right which the plaintiff seeks to enforce is not the right vested in, or acquired by, him as a partner, but a right acquired by him under a distinct subsequent agreement. This agreement does not in any way regulate the rights of partners as such, i.e., it does not in any way regulate their actual rights and obligations as partners, but is, on the contrary, a new and independent right furnishing an entirely different cause of action”. Therefore, the court accordingly concluded that an agreement between former partners as to restraint of trade is not within the scope of Section 69(1). In a case where the firm takes an insurance policy on a motor vehicle belonged to the firm, the claim arises out of a contract of insurance and therefore the same cannot be enforced by filing a suit if the firm is unregistered.8 In Mahendra Singh Choudhary v. Tej Ram Singh9, one of the partners of the firm, i.e. ‘A’ brought an action for injunction requiring that the cheques for payment to the firm should not be paid singly to the other partner ‘B’, but should be paid in the joint name of A & B so that the money could reach the coffers of the firm. But the firm was unregistered. It was held that the action brought by A was not maintainable.

7 AIR 1937 Bom 225 8 Oriental Fire & General Insurance co. Ltd v. U.O.I, AIR 1991 Pat. 250 9 AIR 1987 All. 152 11 | P a g e

A point has been considered by the Supreme Court, namely, whether registration during pendency of the suit could revive the suit or make the same competent at least from the date of registration or not, but no conclusive opinion was given.10 Where a partnership was reconstituted but was not registered whereas the original partnership was registered, the court finding that the dispute related to the original partnership, allowed the case about it to be filed.

SUITS BETWEEN THE FIRMS AND THE THIRD PARTIES (S. 69(2)) According to the section 69(2), if the firm is unregistered, no suit to enforce a right arising from a contract can be instituted by the firm or its partners against a third party. A suit can be brought only by or on behalf of a registered firm and that also by persons whose names appear as partners in the register of firms. To enforce the rights against third parties, it is not enough that the firm is registered; it is further necessary that “the person suing is or has been shown in the Registrar of firms as a partner in the firm”. If the name of one of the partners had not been shown in the Registrar of Firms, the suit filed by the partnership firm must fail.11 This section has been held to be a penal provision, which deprives the plaintiff to its right to get its case examined on merits by a court. Simultaneously, it deprives the court of its jurisdiction to adjudicate on the merits of the controversy between the parties. It is, therefore, to be strictly construed. Therefore, the said provision being mandatory in nature would make the suit incompetent on the very threshold.12

10 Raptakos Brett v Ganesh Property, AIR 1998 SC 3085 11 AIR 1987 Bom. 348 12 Supra, note 10 12 | P a g e

Statutory and Non- Contractual Rights:This sub- section is also confined in its effect only to contract matters. Rights arising independently of contract remain enforceable.13 In Ruby General Insurance Co Ltd v Pearey Lal Kumar 14 the words “arising from a contract” were held to be akin to the words “arising out of the contract” and were construed widely in the context of arbitration clause. But even so these words would not apply to statutory or common law rights because such rights do not have their roots in contract. This view was expressed by the Supreme Court in other cases also. It was held by the SC that the right to evict a tenant was not a right arising from a contract but was a statutory right under the Transfer of Property Act. The eviction proceeding was, therefore, not barred.15 The Supreme Court followed this ruling in Haldiram Bhujiawala v Anand Kumar Deepak Kumar16 and held that a suit to prevent infringement of a trade mark is not barred by the section whether the firm is registered or not. The Court said that it is well settled that a passing off action is a common law action based on tort. This sub-section also does not affect the right to apply for an interim relief under Section 9 of the Arbitration and Conciliation Act, 1996. Where a partner forcibly broke upon the shop of the firm and removed certain articles and surrendered the godown of the firm with an ulterior motive, it was held that such acts of misconduct did not fall within the scope of Section 69. Hence, the suit was for recovery of damages and was maintainable even if the firm was not registered. Actions based on Tort:If the action against third party is not based on contract but on tort, fraud or any other wrongful act, the same is not hit by section 69(2) and the action is maintainable. Thus when

13 Infra, note 19 14 AIR 1952 SC 119 15 Supra, note 10 16 AIR 2000 SC 1287 13 | P a g e

the action relates to detention of property, the action being founded on tort rather than contract, the same is maintainable. For example: If a third person destroyed the property of a firm by any negligent or deliberate act, the firm can definitely sue him whether registered or not.17 Registration of Partnership Deed:Though Section 69(2) says that the registration is compulsory but it doesn’t talk about the registration of partnership deed also. In J.K. Finance & Chit Funds v. R. Surya Kumar 18, a suit was filed by one of the partners of an unregistered firm against the defendants for the recovery of money on the basis of promissory note which was dismissed by the trial court on the ground that the plaintiff could not produce a registered copy of the partnership deed. But the high court reversed the judgment and held that section 69(2) did not require the registration of the partnership deed of a partnership firm. Effect of Change in the Constitution:Where the change in the constitution of the firm is notified to the Registrar, the firm continues to enjoy the status of a registered firm. But if the change is not notified, then it will remain as an unregistered firm only.19 Burden of Proof:The burden to prove that the plaintiff is a registered firm and therefore, is entitled to maintain a suit against a third party is always on the firm in view of the legislative mandate under this section. Exception to the section:However there is an exception to this section that a third party is not barred from bringing an action against an unregistered firm. Third parties can always sue a firm whether registered or not. The disability is that of the firm and not of persons outside it. 17 Infra, note 19 18 AIR 2004 A.P. 190 19 Avtar Singh, Law of Partnership, 3rd ed. (2001), pg. 617-618 14 | P a g e

Registration before Action:The difficulty caused by the section can be overcome by getting the firm registered before an action is brought. The action of an unregistered firm is, however, liable to be dismissed and it cannot be rectified by subsequent registration. A fresh suit will have to be filed after registration provided that it is still within the period of limitation. The names of those filing a suit must appear in the registration.20

SET- OFF AND OTHER PROCEEDINGS (S. 69(3)) The above two disabilities also apply to a claim set-off or other proceedings to enforce a right arising from a contract. A “claim of set-off” mean that if, for example, an unregistered firm is sued by a third party to recover a sum of money the firm cannot say that the money owing by that third party to the firm should be set-off against the claim. Therefore, an unregistered firm cannot claim a set- off. “Other Proceedings”:The words “other proceedings” had created some difficulty as to their import, particularly in reference to the question whether they included “arbitration proceedings”. The Supreme Court has now by its decision in Jagdish Chandra Gupta v Kajaria Traders (India) Ltd21, settled the controversy. In the present case, there is a clause in a deed of partnership provided that in case of dispute between the partners, the matter will be referred to arbitration. A dispute having arisen, one partner appointed an arbitrator to which the other party gave no response. An action was then commenced to enforce the arbitration clause of the agreement. The other partner contended that the firm was not registered and, therefore, the suit should be dismissed. The Supreme Court held that the suit was not maintainable. “It is impossible to think that the right to proceed to arbitration is not one of the rights which are founded on the agreement of the parties. The words of Section 69(3) ‘or other proceedings to enforce a right arising from a contract’, are sufficient to cover the present matter”. This is a welcome decision. If arbitration proceedings were allowed, unregistered firm would, by providing for arbitration in the partnership deed, escape the disability contained in the section.

20 Ibid. 21 AIR 1964 SC 1882 15 | P a g e

Thus, it is a settled proposition that an unregistered firm cannot refer to arbitration a dispute pertaining to its right under a contract. Proceeding after arbitration award:Where a dispute between an unregistered firm and the other party was referred to arbitration at the instance of the other party and the arbitrator have submitted his award which went in favour of the firm, the question arose whether the firm had the right to get the award converted into a court decree and then enforce it. The Madhya Pradesh High Court allowed the enforcement of the award and the Supreme Court affirmed the decision. The court was of the view that Section 69(3) was not attracted. Enforcement of an arbitration agreement is barred. But when the other party activated the arbitration clause against the unregistered firm, and the arbitrator firm, and the arbitrator gave his award, the matter went beyond the scope of the agreement. It was then an award which was sought to be enforced and not a clause in the agreement.22 Exceptions to the Section:There are two exceptions mention in this section only in the form of two clauses i.e. clause ‘a’ and clause ‘b’. 

Actions for dissolution and accounts: - Section 69(3) (a) talks about this exception. First, an unregistered firm and its partners can bring an action for the dissolution of the firm or for accounts of a dissolved firm. They can also enforce any right or power to realise the property of a dissolved firm. Thus the disability to sue disappears with the dissolution of the firm. “It seems that the intention of the Legislature was to inflict disability for non-registration only during the subsistence of the partnership”. For example, A and B purchased a taxi to ply it in partnership. They had done business for about a year when A, without the consent of B, disposed of the taxi. B brought an action to recover his share in the sale proceeds. The only defence available to A was that the firm was not registered. The court held that the business having been closed on the sale of the taxi, the action was for the realisation of the assets of a dissolved firm and, therefore, maintainable. It has been held by the Bombay High Court that a suit for damages for misconduct can be brought by one partner against another even if the firm is not registered, because enforcing the claims of a firm is a realisation of its assets. Where the debts of

22 Kamal Pushp Enterprises v. D.R. Construction Co., AIR 1996 M.P. 139 16 | P a g e

an unregistered firm, being in dissolution, were allotted to a partner, he was allowed to sue. It was not a suit by the firm, and even if it was, it was one for realisation of assets. A partner of an unregistered firm had filed a suit against his co- partners claiming declaration of shares, proper administration of firm and rendition of accounts. The suit was dismissed under Section 69(1). Subsequently the same partner filed another suit praying for dissolution of the firm. This suit was held to be maintainable under Section 69(3) (a). The court said that the subsequent suit was not barred by the doctrine of res judicata because the cause of action was different in the two suits.



Suit on behalf of an insolvent partner: - Section 69(3) (b) mentions this exception. It just says that the official assignee, receiver or court acting for an insolvent partner may bring an action for realisation of the insolvent’s share, whether the firm was registered or not.

EXCEPTIONS OF THE SECTION 69 (S. 69 (4)) Suits where provisions relating to Registration of firms do not apply:Clause (a) of this sub section talks about it. It exempts those firms whose place of business is in such areas, where because of notification under sec. 56, this chapter does not apply. Section 56 provides that the Government of any state may, by notification in the Official Gazette, direct that the provisions of this chapter shall not apply to that state or to any part thereof specified in the notification. Value of suit does not exceed Rs. 100:Section 69 (4) (b) mentions this exception. It says that an unregistered firm or its partners may sue or claim a set-off where the subject-matter of the suit does not exceed Rs. 100 in value. Other exceptions:There are also other exceptions too which might not be explicitly contained in the provision. These are23: Joint Hindu Family Business: - Any suit by the Joint Hindu Family business is always maintainable. 23 Supra, note 19. pg. 649- 650 17 | P a g e

Suit by Proprietorship Firm: - Any suit filed by any proprietorship firm whether registered or not is always maintainable. Interim relief:- An application before the court for interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 has been held to be maintainable whether the firm is registered or not. Criminal proceedings: - A criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881 for the dishonour of a cheque is not in the nature of a civil suit and, therefore, the bar of Section 69 would not prevent an unregistered firm from launching such a proceeding.

INTRODUCTION OF SUB- SECTION (2- A) The Bombay State Amendment of 1984 has added sub- section (2-A) to Section 69. The subsection provides: “No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realize the property of a dissolved firm shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.” It was held by the SC that no amendment of a suit could be allowed where the original suit itself was not maintainable24. The facts of the case were: A partnership firm having six partners came into existence on 29-11-1979 after the deed of partnership was executed. The partnership was duly registered. On the death of one of the partners, the remaining partners agreed to admit the widow of the deceased partner and a fresh deed of partnership was executed on 7-5-1986. The said partnership, however, was not registered nor was the name of the newly- added partner shown in the Registrar of Firms. By a subsequent deed of partnership executed on 3-11-1992, certain terms and conditions of the firm were altered. A suit was filed by one of the partners for dissolution of the firm. The plaintiff took out chamber summons, seeking an amendment to the plaint. The amendment 24 Ramniklal Mohanlal Chawda v. Sharad Vasant Kotak, (1997) 2 Mah LJ 731 (Bom) 18 | P a g e

sought declaration that the provisions of Section 69(2-A) of the Indian Partnership Act which came to inserted by Maharashtra Act 29 of 1984 were constitutionally invalid and not applicable to the plaintiff’s case. It was held that when the present suit was hit and affected by section 69(2-A) of the act and was incompetent and such incompetent suit could not be allowed to be amended. When the suit was barred in view of Section 69 (2-A) and it could not have been entertained, no amendment of such a suit even by way of challenge to Section 69 (2-A) could be permitted. Chamber summons seeking amendment was dismissed. Till the introduction of sub-section (2A), a partner in a firm could file a suit for dissolution of an unregistered partnership firm, or for accounts of the dissolved firm, or to recover the properties of the dissolved firm. With the coming into force of the sub-section in 1985, a partner in an unregistered partnership firm in Maharashtra could not file even those types of suits. In V. Subramanium v. R. Rao25, the Supreme Court declared unconstitutional a significant state amendment to the Partnership Act, 1932. The question regarding the constitutionality of the sub-section was referred to the Bombay High Court, which upheld the section. An appeal was preferred against this judgment before the Supreme Court. The Supreme Court (Markandey Katju and G.S. Singhvi JJ.) struck down the impugned sub-section (2A) as violative of Articles 14, 19(1) (g) and 300A of the Constitution. The Court reasoned that not allowing a partner to file a suit for accounts and recovery of property essentially deprived a partner of an unregistered firm of his right to property in the firm without any compensation. Therefore, the sub-section was in violation of Article 300A of the Constitution (“No person shall be deprived of his property save by authority of law”). Following a line of precedents, it was held that “law” contemplated in Article 300A cannot include a law which is arbitrary in nature. Additionally, the stringency of the law meant that it violated Articles 14 and 19 as well. The reasoning of the Court is seen through the following paragraph from the judgment: “The primary object of registration of a firm is protection of third parties who were subjected to hardship and difficulties in the matter of proving as to who were the partners. Under the earlier law, a third party obtaining a decree was often put to expenses and delay in proving that a particular person was a partner of that firm. The registration of a firm provides 25 V. Subramanium v. R. Rao, (20th March, 2009) 19 | P a g e

protection to the third parties against false denials of partnership and the evasion of liability. Once a firm is registered under the Act the statements recorded in the Register regarding the constitution of the firm are conclusive proof of the fact contained therein as against the partner. A partner whose name appears on the Register cannot deny that he is a partner except under the circumstances provided. Even then registration of a partnership firm is not made compulsory under the Act. A partnership firm can come into existence and function without being registered. However, the Maharashtra Amendment effects such stringent disabilities on a firm as in our opinion are crippling in nature. It lays down that an unregistered firm cannot enforce its claims against third parties. Similarly, a partner who is not registered is unable to enforce his claims against third parties or against his fellow partners. An exception to this disability was a suit for dissolution of a firm or a suit for accounts of a dissolved firm or a suit for recovery of property of a dissolved firm. Thus a partnership firm can come into existence, function as long as there is no problem, and disappear from existence without being registered. This is changed by the 1984 Amendment extending the bar of the proceedings to a suit for dissolution or recovery of property as well. The effect of the Amendment is that a partnership firm is allowed to come into existence and function without registration but it cannot go out of existence (with certain exceptions). This can result into a situation where in case of disputes amongst the partners the relationship of partnership cannot be put an end to by approaching a court of law. A dishonest partner, if in control of the business, or if simply stronger, can successfully deprive the other partner of his dues from the partnership. It could result in extreme hardship and injustice. An aggrieved partner is left without any remedy whatsoever the restrictions placed (by the impugned section) are arbitrary and of excessive nature and go beyond what is in the public interest. Hence the restrictions cannot be regarded as reasonable”.26 Accordingly, Section 69(2A) introduced by the Maharashtra state amendment was declared to be unconstitutional. Suit filed in Individual Capacity:It has also been held that if a suit has been filed in the individual capacity by a person who had been a partner of the dissolved firm against another person who had also been a partner

26 Abhinav K. Mishra, Effect of nonregistration http://lawmanblog.blogspot.in/2012/09/effect-of-non-registration-of.html

of

a

firm,

available

at:

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of the dissolved firm, the bar under section 69(2A) would not be attracted. Therefore, the suit was not barred by the provisions of section 69 (2A) of the Indian Partnership Act.27

CONCLUSION Registration of a partnership firm has been given significant attention by the legislature by incorporating it in a whole chapter in the Act. Though the Act never makes registration compulsory but it would become too onerous for a firm to conduct its operations. Even routine activities like suing a third party for monies due to the firm would be not allowed and thus any partnership with relatively long period of operation would have to get them registered. The registration of firm is condition precedent to its right to institute a suit and thus a court of law cannot proceed with the trial of a suit when the condition precedent has not been fulfilled. In order to institute a suit, a partnership firm must not only be a registered firm but all the persons, who are partners in the firm at the time of institution of suit, must also be shown as such in the register of firms. If one or more of the partners of the partnership 27 Kishore Kumar v. Navin Chandra, AIR 1998 Bom. 153 21 | P a g e

firm have not been shown in the register of firms when the suit is instituted by the firm, the suit is not maintainable. But there have been a number of situations where the court themselves have distinguished the facts of the cases from the one quoted in precedent to such an effect that the case in question is one where there was a new agreement altogether. It does not, therefore, admit of doubt that the suit is inextricably mixed up with the partnership itself and arises out of the partnership contract. Hence the firm can conveniently be placed outside the scope of Section 69. Moreover, there is considerable ambiguity in Section 69(2) as to what is meant by the words 'arising out of a contract. The courts in a number of cases has held that The suit is not for enforcement of any right arising out of a contract entered into by or on behalf of the unregistered firm with third parties in the course of the firm's business transactions. The suit is, therefore, fails to be barred by Section 69(2). The whole idea of this section is that consumers and all others who are dealing with the firm must be aware of the constitution of the company and thus the documents which are available with the registrar of companies are public documents and people dealing with the firm are said to have constructive notice of the details about the firm. Further, subsequent registration cannot cure the initial defect. A plaint filed by an unregistered firm is in fact no plaint at all, because Section 69 makes claims arising out of a contract unenforceable if the firm is unregistered at the date of the institution of the suit. An unregistered firm has no right to sue and, therefore, a plaint filed by it has no legal effect. If at the time the plaint is filed the claim is bound to fail, how subsequent registration can improve the position. There will also be this further difficulty that once a dispute between the partners has arisen, all of them may not sign the application form and consequently the firm may remain unregistered and even if registration is obtained by dropping the names of adversaries, those whose names do not figure in the registration cannot still be sued as partners. It is, therefore, advisable to have the firm registered when it is constituted.

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BIBLIOGRAPHY Articles: 1. “Effect of non- registration of a firm” by Abhinav K. Mishra Books: 1. “Law of Partnership” by Avtar Singh 2. “Partnership Act” by Pollock & Mulla 3. “Law of Partnership” by C.L.Gupta 23 | P a g e

Cases: 1. S.H. Patel v. Husseinbhai Mohd. AIR 1937 Bom. 225 2. Oriental Fire & General Insurance co. Ltd v. U.O.I AIR 1991 Pat. 250 3. Mahendra Singh Choudhary v. Tej Ram Singh AIR 1987 All. 152 4. Raptakos Brett v Ganesh Property AIR 1998 SC 3085 5. Ruby General Insurance Co Ltd v Pearey Lal Kumar AIR 1952 SC 119 6. Haldiram Bhujiawala v Anand Kumar Deepak Kumar AIR 2000 SC 1287 7. J.K. Finance & Chit Funds v. R. Surya Kumar AIR 2004 A.P. 190 8. Kamal Pushp Enterprises v. D.R. Construction Co. AIR 1996 M.P. 139 9. Ramniklal Mohanlal Chawda v. Sharad Vasant Kotak, (1997) 2 Mah LJ 731 (Bom) 10. V. Subramanium v. R. Rao, (20th March, 2009) 11. Kishore Kumar v. Navin Chandra AIR 1998 Bom. 153 Statutes: 1. Indian Partnership Act, 1932

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