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Non-Registration Of A Partnership Firm And Its Consequences

Unlike the Company Act of 2013 or the English Law, the Indian Partnership Act of 2013 doesn't necessarily require the firm's registration. An unregistered firm is still a legitimate firm under the eyes of the law. But indeed, this significant advantage isn't outright, and the firm gets subjected to many disabilities and limitations.

This research paper has attempted to delineate the consequences a firm might suffer because it isn't registered. This paper also outlines the liabilities of an unregistered partnership firm and provides insight into the 69th section of the Indian Partnership Act. The 69th section of the Indian Partnership Act, 2013, has outlined the disabilities of a partnership firm that isn't registered. The constraints persuade the company to write itself. It is deemed unregistered if a company does not follow the fundamental incorporation processes.

The customer or other third parties don't regard an unregistered firm as credible even after it is legitimate under the eyes of the law, which is unlike a registered partnership firm. Members of an unregistered partnership can't sue the business or any of its members (past or present) for breach of contract, and the firm can't sue its customers for breach of contract. They are also not allowed to convert into another entity. These are just a few among the many disabilities highlighted in this paper.

What is a Partnership?

A partnership is when at least two individuals work together with the end goal of creating benefits and profits. The partners provide the capital on their terms and consequently share the duty of maintaining the business on assertion between its partners.

Partnerships are primary in indistinguishable organisations from sole owners. Yet, a partnership keeps up the leeway of having the capacity to raise capital since each partner can make a money related commitment or any monetary contribution. The partners are all in charge of any liabilities of the business. Companies typically support partnerships for the assessment of taxation purposes.

The partnership structure does not consider an expense on the benefits of the business by virtue of the way that it is disseminated to the partners. In any case, this relies upon the Partnership structure and the laws under which it works. By and large, owners of a partnership are presented with a more prominent degree of individual obligation than investors of an enterprise would be A partnership is a legally binding agreement between two or more persons to govern, run, and manage a business and benefit from it.

There are a few different types of collaboration strategies. In certain partnerships, all partners share the same liabilities and rewards, whereas partners have restricted responsibilities in others. There's also the ostensible "silent partner" who isn't involved in the company's day-to-day operations. A partnership might be any effort shared by numerous persons in a broader sense. Governments, non-profit businesses, organisations, and private people might all be involved. The goals of a partnership can also change over time.

There are three primary classifications of partnership in a narrower meaning, a profit-driven endeavour taken up by at least two people: The general partnership, limited partnership, and limited liability limited partnership are three types of partnerships.

All participants have the same legal and financial duties in a general partnership. The persons are the ones who are in charge of the partnership's liabilities. Benefits are distributed in a similar manner. The specifics of benefit-sharing will very certainly be stretched out and written down in a partnership agreement.

Limited partnerships are frequent among professionals such as accountants, lawyers, and drafters. This technique keeps partners close to personal liability so that if one partner is sued for misconduct, the interests of the other partners are not jeopardised. The distinction between equity and salaried partners is further clarified in certain legal and accounting firms. Salaried partners have a higher status than associates, even though they do not control the firm. They are typically reimbursed in accordance with the partnership's benefits.

On the other hand, limited partnerships are a cross between general and limited liability companies. A general partner must have a minimum of one partner who is fully responsible for the partnership's responsibilities. A silent partner, whose risk is confined to the amount invested, is another form of partner. This silent partner stays out of the partnership's administration and day-to-day tasks for the most part.

Finally, the aptly termed limited risk limited partnership is an additional and typically great selection. This limited partnership provides excellent protection from liability for its general partners. Individuals entering into any transaction are not required to be recognised as partners under the authority of Keth Spicer Ltd v Mansell[1]. However, if they engage in numerous activities supporting a partnership, the court may reach a different result.

In Ross v. Parkyns[2], Jessel M.R. stated the law as follows: "It is said (and that there is no doubt) that the mere participation in profit inter se affords cogent evidence of a partnership. But it is now settled by the case of Cox v. Hickman Buller v. Sharp[3] that although a right to participate in profits is a strong test of partnership, and there may be cases where upon a single presumption, not of law, but fact, that there is a partnership, yet whether the relation of partnership does or does not exists must depend upon the whole contract between the parties, and that circumstances are not conclusive."

Benefits of a Partnership Firm

  1. Ease at making a Decision.
    The decision-making process of every company is critical. Because a partnership business has no idea of resolutions, decision-making might be quicker. Partners in a partnership business have broad rights and, in most cases, can perform transactions on behalf of the firm without the consent of the other partners.
  2. Ownership instils a sense of responsibility.
    Each partner's firm's operations are owned and managed by them. Workers in a Partnership Firm are united for the same purpose, even though their jobs may differ. Employees have a sense of responsibility due to ownership, which allows them to work more conscientiously.
  3. Simple to Begin
    A partnership is one of the most accessible forms for companies to create. In most cases, the sole need for founding a partnership business is a partnership deed. As a consequence, forming a partnership on the same day is doable. An L.L.P. registration would take 5 to 10 working days due to the M.C.A.'s requirements for digital signatures, DIN, Name Approval, and Incorporation.
  4. Funding Sources
    Compared to a single proprietorship, a partnership business may readily raise funds. With a more significant number of partners, all partners may make more reasonable contributions. Furthermore, when it comes to loan approval, banks view more favourably on a partnership than a single proprietorship.

The research's scope and utility provide deeper insight into and knowledge of a particular subject matter. It will help us better understand the curriculum of our syllabus as it relates to partnership and its registration. As so, the consequences provide a thorough comprehension of the subject.

Before researching the issue, we were unaware of several aspects; it has dramatically helped us become well-versed in the topic's provisions. It will also help us in the future with our understanding of Special Contracts and the Indian Partnership Act of 1932.

Literature Review:
The research project addresses the many characteristics and scopes of a partnership and how being an unregistered Partnership has various negative implications for a corporation. It mainly discusses the ramifications of having an unregistered partnership firm and the responsibilities that the partners face at such times.

The paper delves deeply into all of the requirements in the Indian Partnership Act of 1932 concerning partnership and its unregistered status. Case laws and other essential judgments put down by courts in situations of unlisted partnership firms in the context of law are used to illustrate the features further.

Research Methodology:
This project is based on doctrinal research. Dr S.N. Jain defines this form of research as "a study involving examination of case laws, arrangement, organising, and systematising legal ideas, and study of legal institutions through legal reasoning or rational deduction." A pure theoretical research approach is another name for it.

According to Jain & Jain, a Doctrinal Legal Research is a study of a legal doctrine by analysing statutory provisions and cases using reasoning power.

Bare Essentials to carry on a Doctrinal Research:

  • Statutory documents
  • Committee reports
  • History of law
  • Judgements, Case reports
  • Case Digests
  • Standard references
  • Legal periodicals
  • Commentaries
  • Government Reports
  • E-Resources

  • Only conventional sources of data are used.
  • The use of secondary data is vital.
  • Ascertainment of Law is required.
  • Research into Legal concepts and principles.

Our previous knowledge about the unregistered status of a firm comes from the study of the Indian Partnership Act of 1932, which talks about how a partnership is entered into when two or more individuals work together on the same business terms with pre-determined contractual clauses and liabilities.

The Act states that being unregistered is legitimate under the eyes of the law. Still, while being legitimate, this benefit isn't absolute and arises many consequences that can be detrimental to the firm. The consequences are mentioned in the 69th section of the Indian Partnership Act of 1932.

Research Questions:
  • What is meant by an unregistered partnership firm?
  • Is registration of a partnership firm mandatory?
  • What is the difference between registered and unregistered?
  • Which section of the Indian partnership act provides a deeper insight into the state of unregistered firms?
  • What are the consequences of being an unregistered firm?

Objectives of the research:
The main objective of this research is to find out the answers to various questions and doubts about the Partnership act, partnership, and Dissolution of Partnership. It will help increase the understanding of contractual relations between partners and the consequences, liabilities, gains, procedures involved, and outcomes of dissolution of a Partnership for a partner.

Unregistered Partnership Firms and the consequences of being unregistered:
Let's look at what registration entails before going on to non-registration. The process of establishing a firm may be described as registration. The method for incorporation is inscribed in the 58th section of the Indian Partnership Act of 1932. Non-registration, on the other hand, is the polar opposite of registration, referring to when a business does not go through the formation process or begins operating without being registered.

Registration of a firm:
The method for incorporation of a firm is outlined in the 58th section of the Indian Partnership Act of 1932, which requires the partnership firm first to fill out a form that includes the following information:
  1. The firm's name,
  2. The address of the members who are underlined,
  3. The firm's lifespan,
  4. The firm's original site, as well as
  5. The location where the firm will conduct all of its operations.

The form is then sent to the registrar, who approves it and completes it by recording the data in the register, which contains the details of registered firms. This procedure is inscribed in the 59th section of the Indian Partnership Act of 1932. One more crucial aspect of the incorporation process is that all members must sign the registration application.

Consequences of non-registration:
As previously stated, the ability to operate a business without going through the incorporation process has advantages, but it also has drawbacks. An unlisted firm doesn't have the same legal privileges as a registered firm. Its operation differs from a registered company, and a non-registered company's rights are limited. The 69th section of the Indian Partnership Act of 1932 specifies the consequences of a firm's failure to register.

It has several repercussions, which are as follows:
  1. There will be no legal action to enforce the rights under the Act:
    A partnership that has not gone through the incorporation process cannot sue another company or a third party. When it comes to launching a lawsuit, an unlisted company does not have the same rights as a registered company. Another important consideration is that the individual or third party suing the unregistered partnership firm must be registered as a business.
  2. There will be no suit to assert rights against any third party:
    An unlisted partnership business cannot sue any third parties in any court, nor can they sue any party, nor can they be sued if registered with the registrar. In any Indian court, there is no means to get a matter heard.
  3. No proper relief:
    If the corporation is not registered, a third party cannot set off a claim above Rs100. Hence the party has no recourse. A privilege like this is only available to registered businesses.
  4. Partners are unable to sue each other in court:
    Disgruntled partners in an unregistered firm cannot sue one another because they lack the legal competence to bring a lawsuit or the power to enforce any claims.

Powers granted to unregistered firms:

Unregistered firms have some capabilities that aren't as broad as those held by registered firms, but they exist.

The unregistered firm is granted the following powers and control:
  1. Even if the firm isn't registered, a third party can nevertheless file a lawsuit against it
  2. In the event of dissolution and account settlement, unregistered firms allow each partner the right to initiate a lawsuit against the other.
  3. The court can order the partner's bankrupt property to be released, taking legal action against it.

Cases Pertaining To The Impact Include:

S.H Patel v. Hussenibhai Mohammad (1935)[4]

The court decided in this particular case that "The right that the partner wishes to enforce is not an acquired right that he has obtained as a partner. Meaning that it does not govern a person's rights but instead establishes a new right that is not dependent on the rights that a partner may have while being one." Creating a fresh right is an entirely distinct activity than what unregistered businesses may be able to engage in.

D.D.A. v. Kochhar Construction Work and Anr (1996)[5]

Even though it is now a registered organisation, the court determined that simply because a court case was initiated for its non-registration, the necessity to be registered as a corporation does not erase the initial error. Despite this, there was no one from the court's institution engaged. Because the firm was unregistered, it was brought to court. The plaintiff's case will be considered useless and irrational if it is discovered that the initial defect has been rectified.

Shriram Finance Corporation v. Yasin Khan and Ors. (1989)[6]

The court dismissed the current partners' complaint since they were recruited after completing the registration. They could not file a lawsuit since their names were not recorded in the company's registration of formation. According to Section 69(2) of the Indian Partnership Act, 1932, "A third party's name must be recorded in the firm's registration register before they may sue. As a result, the allegation was determined to be unfounded."

T. Savariraj Pillai v. R.S.S. Vastrad & Co. (1989)[7]

The proceeding under Section 20 of the Arbitration Act is widely assumed to be void ab initio, meaning that it will not exist from the start; just because it must register itself does not mean that appropriate action will be taken and the suit will be maintainable; it will not cure the original defect.

Padam Singh Jain v. Chandra Brothers (1989)[8]

The court held that "An unregistered firm could file an eviction petition because it is a statutory right, not an enforcement of a right under an agreement that is not provided to an unregistered business", so section 69 of the Indian Partnership Act does not apply.

As stated in the article, unregistered firms have a disadvantage since they lack the legal authority to operate as a business. A corporation's operation is more complex than that of a corporation. Unregistered enterprises are not permitted in the company. From the law's viewpoint, a company that has not gone through the registration procedure does not exist. Despite the drawbacks of being unregistered, the Indian Partnership Act of 1932 gives unregistered businesses a lot of power.

List of statutes:
  1. Indian Partnership Act, 1932
  2. Indian Companies Act, 1956
  1. Keth Spicer Ltd v Mansell, 1970, 1 AII ER 462
  2. Ross v. Parkyns, 1875, 20 Eq 331
  3. Cox v. Hickman Buller v. Sharp, 1860, 8 HLC 268
  4. S.H Patel v. Hussenibhai Mohammad, 1935
  5. D.D.A. v. Kochhar Construction Work and Anr, 1998, 8 SCC 559
  6. Shriram Finance Corporation v. Yasin Khan and Ors., 1989, S.C.R. (3) 484
  7. T. Savariraj Pillai v. R.S.S. Vastrad & Co., 1990, AIR 1990 Mad 198
  8. Padam Singh Jain v. Chandra Brothers, 1989, A.I.R. 1990 Pat 95 ghdas

Award Winning Article Is Written By: Mr.Eshaan Gupta
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