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April 2, 2009
Supreme court gives relief to partners of Unregistered
partnership firm
The Hon’ble Supreme Court of India (“Court”)
has held that a partner of an unregistered partnership firm
under the Indian Partnership Act, 1932, (“the Act”)
in the state of Maharashtra, can file a suit for dissolution of
the firm1. The Court declared sub-section 2A of
Section 692 of the Act (incorporated by the Maharashtra Act No.
29 of 1984 (“State Amendment”), as
unconstitutional and invalid. In doing so, the Court has
provided an effective remedy to partners in an unregistered
partnership firm, in the State of Maharashtra, who were earlier
deprived of their rights to their investment and properties in
the firm and the right to dissolve the firm and ask for accounts
due to the restrictions under the State Amendment.
Significantly, due to the Court now declaring Section 69(2-A) as
unconstitutional and invalid, the position of law has been
returned to as it was as far back as 1984 when the State
Amendment was introduced!
The Law:
Though modeled as per the English Law on Partnerships under
which registration of a partnership firm is compulsory and a
penalty is imposed for non registration of the firm, the Act
does not make registration of a firm compulsory. This was
because making registration compulsory was considered too
drastic a measure that would lead to complexities. However, the
Act did follow the consequences of non registration as laid down
in under English Law. Thus, under the Act, non-registration of
the firm would lead to a disability whereby the firm or its
partner (as the case may be) could not file suits for enforcing
certain claims against other parties or the firm (as the case
may be). Section 69 of Act deals with the effects of
non-registration of the partnership. Section 69 (2-A) of the
Act, as incorporated by the State Amendment, reads as under:
“69 (2-A) 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 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.
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 realise
the property of a dissolved firm.”;
Thus, once the State Amendment came into force on January 01,
1985, a partner in an unregistered partnership firm in the State
of Maharashtra could not file a suit for (1) dissolution or (2)
accounts of a dissolved firm or (3) realize properties of a
dissolved firm, unless the duration of the firm was only six
months or its capital was up to Rs. 2,000 only.
The effects of non registration of a partnership firm are
provided under Section 692
of the Act, whereby a partner of an unregistered firm cannot sue
the firm or other partners enforce a right arising from a
contract. Further, the partners were restricted from suing third
parties on behalf of the unregistered firm to enforce a right
arising from a contract. The Court further observed that one of
the objects of registration of a firm was protection to
third parties trying to enforce their rights against partners of
a firm. Registration provided protection to such third parties
from hardships and false denials of partnership and evasion of
liability. Since the names of partners would be submitted at the
time of registration, the partners so sued would not be able to
deny their liabilities thus saving time and costs in the
enforcement of a decree.
Background:
The Appellant had filed a suit before the Bombay City Civil
Court (“City Civil Court”) for inter alia, dissolution of an
unregistered partnership firm between the appellant and the
respondent. The respondent submitted that the suit was not
maintainable in view of Section 69(2-A), as incorporated by the
State Amendment.
The City Civil Court was of the view that this provision was
unconstitutional being violative of Articles 143 and 19(1)(g)4 of
the Constitution of India and proceeded to make a reference5 to
the High Court of Bombay.
The High Court of Bombay held that the provision was not
unconstitutional and therefore, the aggrieved Appellant filed an
appeal in the Court.
Judgment:
Whilst noting that the State Amendment virtually deprived a
partner in an unregistered firm from recovery of his share in
the property of the firm without any compensation and prohibits
a partner from seeking dissolution of the firm, the Court stated
that in its opinion, the State Amendment effected stringent
disabilities of a crippling nature on a partnership firm.
The Court observed that unlike a company, a firm does not have a
distinct legal entity under the Indian laws and is only a
compendium of its partners and registration did turn the firm
into a distinct legal entity. Hence the partners are co-owners
of the property of the firm, unlike shareholders in a company
who are not co-owners of the property of the company. The State
Amendment virtually deprived a partner from his share in the
property without any compensation and prohibited him from
seeking its dissolution.
The Court noted that the effect of the State Amendment was that
an unregistered partnership firm was allowed to come into
existence and function but it could not go out of existence
(subject to certain exceptions). Consequently, in a case of
disputes between partners, the relationship of partnership
cannot be put to an end by approaching a court of law thus
resulting into extreme hardship and injustice.
The Court further held that the restrictions placed by the State
Amendment were arbitrary and were of an excessive nature and
went beyond what was in the public interest and could not,
therefore, be considered as reasonable.
The Court thereafter held that State Amendment violated Articles
14, 19(1)(g) and 300A6 of the Constitution and was
unconstitutional and was declared as invalid.
Analysis and implications:
By striking down Section 69(2-A), as incorporated by the State
Amendment and declaring it as unconstitutional and invalid, the
Court has effectively granted a remedy to partners in
unregistered partnership firms in the State of Maharashtra.
Going forward, any such partner would be able to file a suit for
(1) dissolution of the partnership or (2) accounts of a
dissolved firm or (3) realize properties of a dissolved firm,
which was done for about 53 years before the State Amendment was
introduced.
_____________________________
1. In V. Subramaniam
Vs Rajesh Raghuvendra Rao - Civil Appeal No. 7438 of 2000.
2. 69.
Effect of non-registration.—(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.
(2) No suits 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 firm.
(3) The provisions of sub-sections (1) and (2) shall apply also
to a claim of set-off or other proceeding to enforce a right
arising from a contract, but shall not affect—
(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 5dissolved
firm; or
(b) the powers of an official assignee, receiver or Court under
the Presidency-towns Insolvency Act, 1909 (3 of 1909), or the
Provincial Insolvency Act, 1920 (5 of 1920), to realise the
property of an insolvent partner.
(4) This section shall not apply—
(a) to firms or to partners in firms which
have no place of business in 1[the territories to which this Act
extends], or whose places of business in 2[the said territories]
are situated in areas to which, by notification under 3[Section
56], the CHAPTER does not apply, or
(b) to any suit or claim or 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 (15 of 1882), to outside the Presidency-towns, is not
of a kind specified in the Second Schedule to the Provincial
Small Cause Courts Act, 1887 (9 of 1887), or to any proceeding
in execution or other proceeding incidental to or arising from
any such suit or claim.
STATE AMENDMENTS
MAHARASHTRA.—In Section 69 of the principal
Act,—
(a) to sub-section (1), the following
proviso shall be added, namely:—
“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 the firm or to realise the
property of the firm.”;
(b) after sub-section (2), the following sub-section shall be
inserted, namely:—
“(2-A) 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 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:
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 realise
the property of a dissolved firm.”;
(c) in sub-section (3),—
(i) for the words, bracket and figures “sub-sections (1) and
(2)” the words, brackets, figures and letter “sub-sections (1),
(2) and (2-A)” shall be substituted;
(ii) for clause (a), the following clause shall be substituted,
namely:—
“(a) the firms constituted for a duration upto six months or
with a capital upto two thousand rupees; or”.—Mah. Act 29 of
1984, S. 13 (w.e.f. 1-1-1985).
Section 69-A
MAHARASHTRA.—After Section 69 of the principal Act, the
following section shall be inserted, namely:—
“69-A.Penalty for contravention of Section
60, 61, 62 or 63.—If any statement, intimation or notice under
Sections 60, 61, 62 or 63 in respect of any registered firm is
not sent or given to the Registrar, within the period specified
in that section, the Registrar may, after giving notice to the
partners of the firm and after giving them a reasonable
opportunity of being heard, refuse to make the suitable
amendments in the records relating to the firm, until the
partners of the firm pay such penalty, not exceeding ten rupees
per day, as the Registrar may determine in respect of the period
between the date of expiry of the period specified in Sections
60, 61, 62, or as the case may be, 63 and the date of making the
amendments in the entries relating to the firm.”—Mah. Act 29 of
1984, S. 14 (w.e.f. 1-1-1985).
3. 14. Equality before
law.—The State shall not deny to any person equality before the
law or the equal protection of the laws within the territory of
India.
4. 19. (1) All citizens
shall have the right—
(g) to practise any profession, or to carry
on any occupation, trade or business.
5. Under Section 113 of
the Code of Civil Procedure, 1908.
6. 300-A. Persons not to
be deprived of property save by authority of law.—No person
shall be deprived of his property save by authority of law.
-
Sahil Kanuga
&
Shafaq Uraizee-Sapre
You can direct your queries or comments to the authors
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