Introduction:
With the changing realms of the business ventures today, it is important to be aware of the legal aspects of a partnership firm, especially with regard to the unregistered ones. The Indian Partnership Act, 1932 unequivocally lays down all the provisions linked with partnership firms. It separately mentions the effect of non-registration under section 69. But before digging into the main question it is important to be aware o its basics.
What is a partnership firm?
Section 4 of the Indian Partnership Act, 1932[1] stows distinctly the meaning of Partnership, Partners, Firm, and Firm- name. It reads as follows: “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into a partnership with one another are called individually, partners, and collectively a firm, and the name under which their business is carried on is called the firm-name[2]”. Hence, it can be concluded that partnership is simply a coming together of persons who agree to share the profits so received through their business. Although, apparently the meaning is clear there is a point of confusion that generally pops out. It is the difference between firm and company. A point to be noted here is that there is a wide difference between a firm and a company. While a Company is governed by the Companies Act, 2013[3], a Firm is governed by the Indian Partnership Act, 1932. Moreover, a company has a separate existence from its members while a firm does not possess any such separate existence, rather, the partners and the firm together work as a single unit.
What is the registration of a firm?
Registration in simpler terms is a process of eliminating the possibility of confusion that might occur in the future with regard to the partnership firm. However, it is not a mandatory operation to be performed for the existence of a partnership firm. The entire process of registration of such a firm is mentioned under section 57, 58, and 59 of Chapter- 7- ‘Registration of Firms’. The registration process is complete when the Registrar is satisfied with the fulfillment of section 58 and duly records the entry of the statement in the ‘Register of Firms’ and files the statement.
Effect of non-registration:
Since registration of a partnership firm is not mandatory under the Indian Partnership Act, not every firm is registered under the same. On the same note, Section 69 of the said Act, deals with the ‘Effect of non – registration of firms’. An unregistered firm has to face certain restrictions which can be summarised as follows:
1. No partner can file a suit against other partners of the firm.
According to section 69 (1) of the Act, in the wake of enforcing a right arising from a contract or conferred by the Act, A partner (or anyone on behalf of him) of the unregistered firm cannot file a suit against another partner of that firm in any Court of justice.
2. The firm cannot file a suit against the third party.
Another right that the unregistered firm is deprived of, as provided under sub-clause (2) of section 69, is that of instituting a suit in any court by or on behalf of the firm against any third party. Third-party as defined under section 2 (d) of the Act means any person who is not a partner of the firm. In the case of Seth Loonkaran Sethiya And Ors. V. Mr. Ivan E. John And Ors.[4], the Supreme Court held the suit unmaintainable as the plaintiff had entered into an agreement as a partner of ‘Sethiya & Co.’ an unregistered firm and the suit was unambiguously for the benefit and in the interest of the firm. However, on the contrary, a third party can file a suit against the firm.
3. No proper relief.
There was a controversy relating to the term ‘other proceedings’ in sub- section 3 of section 69 as to whether the arbitration proceedings were covered under it or not. Finally, in the case of Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd[5]., the Supreme Court of India had settled the issue by declaring that arbitration comes within the ambit of these words. Therefore, even arbitration is not a remedy available to the aggrieved of the unregistered firm. This has been held to protect the purpose of the section and to bind unregistered firms behind the bars of disability. Also, reading down clause (a) of sub-section 3 of section 69, it can be concluded that, in the case of an unregistered firm, the claim exceeding Rs. 100 cannot be set off by a third party.
4. The firm being unregistered does not become a bar for instituting a criminal case.
In the case of Beacon Industries v. Anupam Ghosh[6], a criminal suit was instituted on the issue of bouncing of cheques. The High Court in this regard had held that section 69 (2) of the Act clearly lays out that a civil suit cannot be filed but it does not bar the filing of a private complaint. Therefore, the bouncing of the cheque was purely a criminal liability and not to be treated as a part under the exemption of the Act. It can hence be concluded that a suit apart from a civil suit can be instituted by any partner of the unregistered firm. Among the list, this provision is rather unfettering in nature.
Can a partner of an unregistered firm sue for the realization of property on its dissolution?
Before arriving at a riposte to the question, it is important to give reference to the judgment of V. Subramaniam vs Rajesh Raghuvandra Rao[7] as given on 20 March 2009. The primary issue in challenge before the court was the sub-section 2A, which was introduced by the Maharashtra Amendment to Section 69 of the Act, being the Maharashtra Act no.29 of 1984. The said section read as follows:
“(2A) 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 realise 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: Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of a dissolved firm or to realize the property of a dissolved firm[8].”
The Court declared the above provision as unconstitutional being violative of Article 14, 19(1)(g), and 300Aof the Constitution of India. The said section prevented the partner of the unregistered firm to file a suit for dissolution of an unregistered firm, for accounts of the dissolved firm and to recover the properties of the dissolved firm. The Court held that this amendment allowed an unregistered partnership firm to exist and function but deprived its dissolution. Such a provision would lead to the arbitrariness of a corrupt, dishonest partner while the innocent one would be left with no remedy. Therefore, the said provision could nowhere fulfill the purpose of the Indian Partnership ct, 1932 but provided for a virtual hurdle for partners to recover their share in the property of the firm.
Consequently, it can be concluded that the impugned question has an affirmative answer and a partner of the unregistered firm can file a suit for realisation of property on the dissolution of the firm.
Conclusion:
The Indian Partnership Act, 1932 recognizes both registered and unregistered partnership firms. Although there are certain restrictions on the unregistered firms, the Act provides all the reasonable and necessary legal resorts to the unregistered firm and its partners.
References:
[1] Act No. 2 of 1932
[2] https://indiankanoon.org/doc/107341/
[3] Act No. 18 of 2013
[4] AIR 1977 SC 336
[5] 1964 AIR 1882
[6] (2004) 52 SCL 345 (Kar)
[7] CIVIL APPEAL NO.7438 OF 2000
[8] https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf
This article is authored by Phalguni Garg, Second-Year, B.A. LL.B (Hons.) student at Amity Law School Noida, Uttar Pradesh.
Also Read – Introduction of the Partnership Act, 1932
