lawyers in India

Effect of Non-Registration

Written by: B.Jyoti Kiran - IV Year,NLIU
Constitutional law
Legal Service
  • The section is a long one. Its length is due to the desire of the Legislature to make the adverse effects of non-registration so broad-based and comprehensive as to make the provisions virtually compulsive.

    The outline of the provisions by way of brief points is:
    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 firm remains liable to be sued by persons outside it, and cannot plead a set-off. Only suits for dissolution of the firm, and the powers of official assignees under the Insolvency Acts, are exempt from the prohibition. A small and harmonious firm dealing in a small way and mainly for ready money might be content to take these risks, mitigated as they are by the proviso of sub-s (4)(b) as to claims not exceeding Rs 100 in value. For a business of any considerable magnitude they appear sufficiently deterrent. Mandatory character.

    Now, the mischief primarily intended to be prevented by the mandatory provisions of Section 69 was the hardship and difficulty to which third parties dealing with a firm were subjected in the matter of proving as to who were the partners. As to the provisions affecting the partners themselves it seems clear that the main object and intention of the Legislature was to prevent a partner from enforcing his claims against fellow partners if the firm was not registered and to compel in such a case dissolution of the firm by laying down that the court will entertain suits only when dissolution and accounts and winding up of the affairs of the firm is sought or where accounts or winding up of the affairs of an already dissolved firm is sought.

    The English law compels registration at the pain of penalty; Section 69 compels it at the pain of disability to sue. Thus it becomes necessary for the survival of a firm that it should be registered. However, where a person in his individual capacity is not shown partner of the firm but as Karta of Hindu undivided Family he is partner of the firm, he is therefore duly authorized to institute the suit. A Joint family firm is not subject to the restrictions imposed by Section 69 of the Act. Similarly, there are other situations also where firms can escape the liability of being registered. Hence, this project aims to deal with all those circumstances where the scope of Section 69 extends and where the law proves to be a mere facade.

    Disability Of Firms Only

    The burden lies on the defendant who wants to non-suit the plaintiff to show that there is or was a firm and the plaintiff's suit is in respect of the matters relating to the partnership. The Orissa High Court said on the facts of a case that where there is not an iota of evidence to show that there was any such agreement between the plaintiff and defendant as made them partners. Section 69 would not be applicable.

    Non-Registration Can Be Raised At Any Stage

    There is, however, a bewildering variety of decisions on the subject. For example, the Andhra Pradesh High Court allowed a suit to proceed where though the defendant had raised the question of registration in his written statement and did not press it into an issue and though the plaintiff-partner had not produced a copy of the Registrar of Firms so as to show that his name was there. The matter cannot, however, be raised at the stage of the execution of a decree. Though, of course, an execution can be sought to be stayed on the plea of questioning the validity of the decree on the ground of non-registration.

    The Madras High Court has held that a decree passed by a court in a suit by a firm is not a nullity where the matter of non-registration was not raised in the suit and accordingly the validity of the decree cannot be challenged in a separate suit. All these cases with varying results suggest that the matter of registration and maintainability of the suit should be decided as a preliminary matter.

    Effect of Subsequent Registration

    HARRIES CJ of the Patna High Court explained the reasons for this approach:
    "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. The single Judge of the Calcutta High Court held that there was no reason why the court should not treat the plaint as filed on the date of registration. But I know of no provision of law, which permits a court to treat a plaint as filed on a date subsequent, to the date upon which it was actually filed. The best course in such a case for the suer to adopt is to institute a fresh suit after registration and the court will entertain it if it is still within time.

    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. Partners cannot be compelled to sign registration documents, nor an action is allowed to so compel them. Registration of Sub-partnership A sub-partnership, (Section 29), is the agreement by a partner to share his share of the profits with certain other persons. Since the Partnership Act applies to such partnerships also, for the purposes of suits as between them registration of the sub-partnership would seem to be necessary. Such firms have been recognized as valid for registration purposes.

    Scope of Sec.69 (1) And Matters Outside Its Preview

    Two conditions are necessary to enable a partner to sue his co-partners or the- firm. First, the firm should be registered and, second, the name of the partner suing must figure in registration. The scope of the sub-section was examined by the Bombay High Court in S.H. Patel v. Husseinbhai Mohd, 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 the firm being unregistered.

    Reliance was placed by the defendant upon an earlier decision of the Bombay High Court68 In that case the plaintiff and defendant had been partners with equal shares. On dissolution, the accounts were made up and the defendant paid the plaintiff Rs 600 on account of income tax, which it was, estimated the firm would be liable to pay. Subsequently an assessment of Rs 3400 was made, which the plaintiff paid and sued the defendant for half the amount minus Rs 600 already paid. The firm was not registered and the plea of absence of registration was upheld as the plaintiff's cause of action was the original contract of partnership and not any new agreement to pay half the money. DESAI J in the case of S.H. Patel v. Husseinbhai Mohd. distinguished the facts of this case from the one quoted in precedent. 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.

    Principles Applicable To Construing S.69

    DESAI J at this stage tried to explain the principles by which the provisions of Section 69 should be construed. The court accordingly concluded that an agreement between former partners as to restraint of trade is not within the scope of Section 69(1)A similar ruling of the Allahabad High Court, where it was held that a suit by A, the partner of an unregistered dissolved firm against B, the other partner, to recover a sum which was overdrawn by B from the partnership assets and the amount which represented B's share of the loss incurred by the partnership, is a suit to recover the property of a dissolved firm within the meaning of the exception in Section 69(3)(a).

    Matters Simultaneous with Dissolution and Settlement of Accounts The Madras High Court had to consider a case in which an agreement by one partner to pay a sum of money to the other was contemporaneous with dissolution and settlement of accounts, but even so the action was allowed. The court said that this was a suit for the enforcement of an agreement entered into after the dissolution or at the time of dissolution between partners under which some definite amount was payable by one partner to another. The section has to be strictly construed and the court will not be justified in holding that the bar extends to dissolution and account.

    Matters Personal to Partners during Subsistence of Firm. Where any agreement is made or a cause arises between the partners during the subsistence of the firm, what should be the position. If the matter in question is purely personal between the partners, or has nothing to do with contract of partnership or Partnership Act, for example, a tort or tenancy action, between partners, it will be clearly outside the scope of the section. The section will be attracted when the matter is contractual and with partnership content or is about a provision of the Partnership Act which confers a right upon a partner. The Jammu and Kashmir High Court witnessed a case of mixed nature.

    The plaintiff and the defendant formed a partnership to run a hotel. The hotel was to be located in a part of the premises belonging to the plaintiff and which part was already in the occupation of the defendant. A provision was, therefore, inserted in the partnership agreement that if the defendant continued in possession for more than three months after the date of the partnership agreement, he must pay a sum of money per month as compensation for use and occupation. The suit was to recover this amount and also to evict the defendant from the premises. The firm was not registered. Figured in the agreement and. therefore, it was a right arising out of agreement and clearly within the sweep of Section 69.

    "The dispute admittedly relates to the premises in which the business of the partnership was to run. It is also directly related to the provisions of the partnership deed itself. 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. Supposing there was no such provision in the partnership deed about the premises? Quite obviously the matter would have been outside the scope of the partnership and beyond the reach of the crippling hands of Section 69, and the plaintiff would have enforced his right of ownership and compensation for use and occupation. A matter of personal nature should not cease to be personal merely because it finds some incidental place or reference in the partnership deed. The substance of the right in question should be the guiding criterion.

    Suits Between Firms And Third Parties [Sub-S. (2)}

    Contractual matters
    An unregistered firm cannot sue any third party for the enforcement of any right arising from contract. There are two requirements of the right to sue namely, the firm should be a registered one and the person suing should appear as a partner in the registration. The Supreme Court did not allow an unregistered firm and its partner to recover sums of money advanced by the firm to a mill. JASWANT SINGH J said:
    "In the instant case. Seth Suganchand had to admit in unmistakable terms that the firm 'Sethiya & Co.' was not registered under the Indian Partnership Act. It cannot also be denied that the suit out of which the appeals have arisen was for enforcement of the agreement entered into by the plaintiff as partner of 'Sethiya & Co., which was an unregistered firm. That being so, the suit was undoubtedly a suit for the benefit and in the interest of the firm and, consequently, a suit on behalf of the firm. It is also to be borne in mind that it was never pleaded by the plaintiff, not even in the replication, that he was suing to recover the outstanding of a dissolved firm Thus the suit was clearly hit by Section 69 and was not maintainable.

    The Supreme Court examined the scope of the words "arising from contract in its decision in Haldircon Bhujiawala v Anand Kumar Deepak Kumar. A person who had been carrying on business in the name of "Halidiram Bhujiawala" since 1941 constituted in 1965 a partnership with his two sons M and S and his daughter-in-law K, who was the wife of his third son. In 1972, the firm got the said name registered with the Registrar of Trade Marks. On 16-11-1974, the partnership was dissolved and under the terms of the dissolution deed the above trademark fell exclusively to the share of M for the whole country except West Bengal. K was given ownership of the trademark rights for West Bengal. The said person in a will reiterated the rights conferred by the dissolution deed. He died in 1980. M died in 1985 leaving behind four sons. All of them got their names recorded as subsequent joint proprietors.

    Three of them formed a partnership in 1983 and were running a shop in New Delhi selling various goods under the above said trademark of "Haldiram Bhujiawala". In the meantime, in 1977 K's husband and his son applied for registration of this very name at Calcutta claiming to be the full owners of the trademark without disclosing the dissolution deed dated 16-11-1974. The registered trademark of M's sons was, in the usual course, renewed on 29-12-1986 till 28-12-1993. They had also acquired a right on account of prior adoption and long user. They filed a suit in which the firm consisting of three sons of M was plaintiff 1 and the fourth son of M was plaintiff 2. The first defendant was a newly constituted firm, which intended to start its business, and was formed by K's son. The second defendant was K's son in his individual capacity. The suit sought, inter alia, a permanent injunction restraining the defendants (appellants herein) from infringing the trademark/name "Haldiram Bhujiawala" and from using the same. The violation of the trademark by the defendants came to the notice of the plaintiffs when the defendants opened a shop in New Delhi. The plaintiffs also claimed a certain amount by way of damages.

    The cause of action for the suit was that the defendants had acted "in violation of the common law and contractual rights of the plaintiff". The defendants (appellants herein) filed for rejection of the plaint on the ground that the 1st plaintiff was a partnership not registered with the Registrar of Firms on the date of the suit, i.e. on 10-12-1991 and that, therefore, Section 69(2) of the Partnership Act, 1932 was a bar to maintainability of the suit. They further pleaded that the subsequent registration of the firm on 29-5-1992 would not cure the initial defect. Before the Supreme Court the question was as to the applicability of the bar under Section 69(2) of the Partnership Act, 1932 to the present case and the scope of the words "arising from a contract" occurring therein. The appellants contended that the suit sought to enforce a right "arising from a contract", namely, the contract of dissolution dated 16-11-1974 and that, therefore, the suit was barred by Section 69(2). Dismissing the appeal, it was held that the suit was not barred by Section 69(2) if a statutory right or a common law right is sought to be enforced.

    The Court said:
    The question is as to the nature of the right sought to be enforced in the present suit. It is well settled that a passing-off action is a common law action based on tort. Therefore, a suit for perpetual injunction to restrain the defendants not to pass off the defendants' goods as those of the plaintiffs by using the plaintiff's trademark and for damages is an action at common law and is not barred by Section 69(2).

    Likewise, if the relief of permanent injunction or damages are being claimed on the basis of a registered trademark and its infringement, the suit is to be treated as one based on a statutory right under the Trade Marks Act and is not barred by Section 69(2). Therefore, in both these situations, the unregistered partnership in the present case cannot be said to be enforcing the right 'arising from a contract'.

    Moreover, there is considerable ambiguity in Section 69(2) as to what is meant by the words 'arising out of a contract. Purpose behind Section 69(2) was to impose a disability on the unregistered firm or its partners to enforce rights arising out of contracts entered into by the plaintiff firm with the third-party defendants in the course of the firm's business transactions. Moreover, the contract by the unregistered firm referred to in Section 69(2) must not only be one entered into by the firm with the third-party defendants but must also be one entered into by the plaintiff firm in the course of the business dealings of the plaintiff firm with such third-party defendants.

    Therefore, it is clear that the suit is based on infringement of statutory rights under the Trade Marks Act. It is also based upon the common law principles of tort applicable to passing-off actions. 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, not barred by Section 69(2).Bombay State Amendment" The Bombay State Amendment of 1984 has added sub-section (2-A) to Section 69. The sub-section 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:
    The amendment has the effect of barring even suits for dissolution. A suit was filed for dissolution, which had to be dismissed for non-registration. An amendment to the suit was sought. The court did not permit it. No amendment of a suit could be allowed where the original suit itself was not maintainable.

    Statutory And Non-Contractual Rights

    If for example, the property of a firm is damaged by the negligent or deliberate act of a third person, the firm can definitely sue him whether registered or not. Non-registration is not a license for anybody to take liberty with the property of the firm. Courts have thus to distinguish for the purposes of Section 69 contractual claims from those which arise independently of a contract. In a curious decision the Patna High Court did not allow an unregistered firm to enforce its insurance claim in respect of its motor vehicles. An insurance claim is not so much a claim under a contract as an action to collect the property of the firm and in the manner of collecting the payment of a cheque and should have been allowed by bringing it in that category.

    Effect of Change In Constitution Not Notified To Registrar

    In a case before the Bombay High Court, the plaintiff's personal business was taken over by a partnership firm along with all the assets and liabilities and he became a partner in the firm. He had supplied some quantity of the paper to a firm before the takeover. The claim in respect of the same also became partnership property. As an individual he could have enforced his claim, but as a claim of the firm, it could not be enforced because the firm was not registered. The court lamented that a genuine claim running into lakhs of rupees could not be enforced for technical consideration and the recipient of the material obtained an unjust enrichment.

    By or on behalf of firm The bar imposed by Section 69(2) comes into operation when the suit is by or on behalf of the firm. The individual right of a partner to sue a third party is not within the preview of the provisions

    The law has been thus stated in LINDLEY ON PARTNERSHIP:
    'One partner may sue alone on a written contract made with himself if it does not appear from the contract itself that he was acting as agent of the firm; and one partner ought to sue alone on a contract entered into with himself, if such contract is in fact made with him as a principal, and not on behalf of himself and others.

    The principle thus laid down was followed by the Allahabad High Court in a case were an individual had taken out a lease in his personal capacity and he was allowed to enforce it though subsequently he had taken two partners with him. The court said that regard must be had to the fact that at the time of the lease agreement he was all by himself and, therefore, could have enforced without joining his subsequent partners as co-plaintiffs. His individual right cannot suffer because of non-registration of a partnership, which he subsequently constituted.

    Set-Off Or Other Proceedings[S.69 (3)]

    The words "other proceedings" had created some controversy as to their import, particularly in reference to the question whether they included arbitration proceedings. Some High Courts have relaxed the rigor of Section 69 to this extent that an arbitration agreement can be implemented without the intervention of the court. Such submission is not a "proceeding" within the meaning of Section 69(3). The Calcutta High Court explained how this stands outside the scope of Section 69."It appears to be implicit in the terms of Section 69 itself that proceedings contemplated by it are proceedings in court.

    Those contemplated by sub-sections (1) and (2) are expressly so. Sub-section (3) begins with a reference to the provisions of sub-sections (1) and (2) and says significantly that they shall apply also to a claim of set-off or other proceeding to enforce a right arising out of a contract. It appears that when sub-section (3) draws in the provisions of sub-sections (1) and (2), it draws in the whole of those provisions including the reference to proceeding in court, and when it says that the provisions of the earlier two sub-sections shall apply 'also' to a claim of set-off or other proceeding, it seems to make it abundantly clear that the proceedings it is contemplating are of the same class as those in sub-sections (1) and (2).The Supreme Court has now by its decision in Jagdish Chandra Gupta v Kajaria Traders (India) Ltd . settled the controversy in favor of the view that arbitration proceedings would also fall within the sweep of the words "other proceedings". '

    The facts were:
    A clause in a deed of partnership provided that in case of any dispute between the partners, the matter would be referred to arbitration. A dispute having arisen, one partner appointed an arbitrator to which the other partner 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. HIDAYATULLAH J (afterwards CJ) emphatically said, "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 proceeding to enforcer right arising from a contract' are sufficient to cover the present matter This is undoubtedly a welcome decision. If arbitration proceedings were allowed, unregistered firms would, by providing for arbitration in the partnership deed, escape the disability contained in the section. That would have virtually nullified the very purposes for which Section 69 was there.

    Proceeding After Arbitration Award

    In this case there was a contract between the petitioner and the respondent an unregistered partnership firm. A dispute arose between them. The petitioner gave a notice to the respondent firm for appointment of an arbitrator and suggested five names. The respondent agreed to the name of one of the arbitrators, who, as sole arbitrator, conducted the arbitration proceedings and ultimately filed the award in the court for making it the rule of the court. An objection was raised by the petitioner, contending that proceedings relating to enforcement of an award were covered within the meaning of Section 69(3) of the Partnership Act. It was held that the bar under Section 69 is with respect to the filing of a suit, claim of set-off or other proceedings to enforce a right arising from a contract by an unregistered partnership firm.

    The proceedings arising out of an award cannot be put on par with the proceedings arising out of an agreement. Once an award was made and filed in court either by the arbitrator himself or on the motion of any one of the parties, the court had no option except to make it a rule of court if it came to the conclusion that there was no cause to remit the award or any of the matters referred for reconsideration or set aside the award after the time for making an application to set aside had expired. The proceedings after the filing of an award were not, therefore, hit by Section 69(3). A bar under Section 69 is with respect to a suit/proceeding/claim of set-off to enforce a right. As the unregistered firm had not initiated the proceeding and had only to defend it, on this ground also it could safely be said that there was no bar under Section 69(3). Section 69(3) was not attracted on the facts of the present case. This decision was affirmed by-the Supreme Court in Kamal Pushp Enterprises v D.R. Construction Co.

    It seems clear that the main object and intention of the Legislature was to prevent a partner from enforcing his claims against fellow partners if the firm was not registered and to compel in such a case dissolution of the firm by laying down that the court will entertain suits only when dissolution and accounts and winding up of the affairs of the firm is sought or where accounts or winding up of the affairs of an already dissolved firm is sought.

    But there have been a number of situations where the court themselves have0 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.

    Often it has been quoted by the counsels that it's not a case arising out of the original contract of partnership. Supposing there is no mention of a provision in the partnership deed, the matter is quite conveniently placed outside the scope of the partnership and beyond the reach of the crippling hands of Section 69.On the other hand a matter of personal nature should not cease to be personal merely because it finds some incidental place or reference in the partnership deed.
    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). These are but only a few situations to prove that often the law is not what the courts make out of it from the books of statutes, but how the courts choose it to be made out. Hence in a considerable number of situations the courts have merely paid a lip service to Section 69. Infact it has conveniently decided the cases in such a way that they fall beyond the so-called 'crippling hands ' of Section 69. In such circumstances it is not difficult to prove that the law of having a firm registered is no more than a mere formality and the firms face little encumbrances even if they are not registered.

    # The Partnership Act by Pollock and Mulla
    # Law of Partnership by Avatar Singh
    # The Law of Partnership by Justice P.S. Narayan
    # The Law of Partnership by R.R. Maurya
    # Commentaries on Partnership Act by P.N. Chadha

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