Introduction
A partnership firm is an organization that is form with two or more persons to run a business with an intention to earn profits. Each member of such a union is known as a partner and collectively known as a partnership firm. These firms are govern by the Indian Partnership Act, 1932.
Chapter VII of the Indian Partnership Act, deals with the registration of partnership firms. The act neither makes any compulsion on registration of firms nor imposes any penalties. However certain disabilities are provided in Section 69 of the Act for unregistered firms.
Effect of non-registration
1. No suits can be filed between partners and the firm [section 69(1)]
Section 69(1) provides that; no suit can be institute in any court to enforce rights arising from a contract or conferred by the Partnership Act by any partner against his co-partners or the firm; unless the following condition fulfill-
i) The partnership firm is registered
ii) The partners filing the suit have been shown in the register of firms as partners of firms.
Also in Oriental Fire & General Insurance Co. Ltd. V UOI[1] it has been held that claim for insurance, except by statute, cannot be enforced by filing a suit if the firm is unregistered.
In Balaji Enterprises v Geeta Enterprises[2] the court held that when the name of the person signing the plaint and claiming as a partner in the firm, is not shown in the Register of the firm, the firm though registered, the suit is not maintainable.
2. No suit can be filed by the firm on the third party [section 69(2)]
Section 69(2) says that no suit can be institut to enforce any right arising from a contract by an unregistered firm against any third party. Again subsection provide two conditions to be fulfill before suit can be filed-
i) The firm must be a registered firm[3]
ii) The person suing should be in the Register of Firms as a partner of the firm
In Muthu Kumarswami v. Kumar Textiles,[4] it has been held that the provision contained in sec. 69(2) is mandatory, and registration of the firm is a condition precedent to its right to institute a suit. Even if the defendant does not arise any objection the provision contained in this section cannot be flouted.
In Sharad Vasant Kotak v Ramnilklal Mohanlal Chawda[5] it has been held that sub-section(2) of section 69 is a penal provision, which deprives the plaintiff of its right to get its case examined on merits by the court. Simultaneously, it deprives the court of its jurisdiction to adjudicate the merits of the controversy between the parties.
3. If action based on tort then registration not necessary
If the action against a third party is not base on contract but on tort, fraud, or any other wrongful act. The same is not hit by section 69(2) and the action for the same is maintainable.
4. Suit in terms of prosecution maintainable
In Intrajit Gogoi v. Auto Sales and Service Station[6] the court held that section 69 did not bar the institution of criminal prosecution against the drawer of the cheque as accused of the dishonor of the said cheque.
5. Action based on Statutory Provision maintainable
It may be noted that the disability is there in respect of a right arising out of a contract. If the right is based on a contract but arises from the statutory provision, the bar under Section 69(2) is not applicable at the same.
6. Arbitration proceeding not barred under Section 69-
It is held by the Supreme Court in Kamal Pushpa Enterprise v D.R. Construction Company[7], that bar under section 69 has no application to proceedings before the arbitrator proceedings for the enforcement of the arbitration award is not a right under the contract.
7. No disability against third parties
In Kantilal Jethalal Gandhi v Ghanshayan Ratilal Vyas[8] , held that a third party is not barred from bringing an action against an unregistered firm.
8. The claim of set-off or other proceedings barred
According to sub-section (3), the disabilities mentioned above also apply to a claim of set-off or other proceedings to enforce a right arising from a contract.
9. Claim under section 65, Indian Contract Act also barred
In Bijendra Prasad v. Duleshwari Devi[9], it was held that the suit for the return of benefit under section 65 of the Contract Act was barred under section69 of the Partnership firm, as it was unregistered.
10. Bar to enforce right arising out of Contract
The barring provision of section 69 is confine to the enforcement of rights arising out of contracts.[10]
11. Suit for Damages not barred
In Chandrayya Mutwayyatrabatti v. Sidram Gaupat Ingale[11] the court said that the suit was for the recovery of damages for misconduct committed by one of the partners by his act of forcible breaking the lock of the shop and taking away certain articles lying therein. The suit of this nature, the court says, is not barr by section 69.
Burden of Proof: Whether Firm is Registered or Not?
A Partnership firm is to have no distinct legal existence. Those who are desirous to avail the facility provided under the law, to sue in the name of or on behalf of partnership firm, must establish the basic facts that the suit is maintainable.
In A.P. Co-op Wool Spg. Mills Ltd. Vs G.M. & Co. Wool Merchant[12] held that it is the plaintiff who can plead and prove that the firm is a registered firm.
Exceptions
The disabilities discussed above are not applicable to the unregistered firm in the following cases-
1. Suit for dissolution [Sec. 69(3)(2)]
2. Suit on behalf of the insolvent partner [Sec. 69(3)(b)]
3. Suit where provisions relating to Registration of Firms do not apply [Sec 69 (4)(a)]
4. When the value of the suit does not exceeds Rs. 100 [Sec 69(4)(b)]
Conclusion
The idea behind making these provisions is that in their interest, the partners may get the firm register, and thereby the interest of the third-party with whom the firm may be dealing may be protected. Hence registration is optional but for the purpose of suit it is mandatory.
References:
[1] AIR 1991 Pat 250
[2] AIR 2007 (NOC) 48 (Mad.)
[3] It is to register under the Partnership Act and not the Income Tax Ac. See Surajmal v Srikrisan, AIR 1973 Bom. 313
[4] AIR 1996 Mad. 433
[5] AIR 1998 SC 877
[6] See, AIR 2008 (NOC) 1760 (Gau.)
[7] AIR 2000 SC 2676
[8] AIR 1994 Guj. 56
[9] AIR 1998 Pat, 122
[10] Kamal Navichandaran v Moolchand, AIR 1966 Bom. 111
[11] AIR 2006 Bom. 76
[12] AIR 2003 AP 418 (Emphasis added)
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