Partnership is defined under section 4 of partnership act, 1932. It says that, partnership is a relation between two or more parties who mutually agree to carry on a business and share the profits, liabilities, and other responsibilities of a firm.
Registration of a partnership firm means the incorporation of a firm officially. It brings the business to existence. The process of firm registration is detailed under Sections 58 and 59 of the Indian Partnership Act. The registration is to be done with Registrar of Firms. However, registration of partnership is not necessary in India. But there are certain effects of the non-registration of partnership firms. Non-registration of a firm simply means that the business skips the formalities of incorporation and ceases to exist in the eyes of the law. Section 69, under the Partnership Act, enlists these limitations and consequences. Due to its non-registration, a firm could come across immediate or long-term consequences in business as well as legal aspects.
Section 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 suit 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 dissolved 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 the territories to which this Act extends, or whose places of business in the said territories, are situated in areas to which, by notification under section 56, this Chapter does not apply, or
(b)to any suit or claim of 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 (5 of 1882), or, 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.
EFFECTS OF NON-REGISTRATION OF PARTNERSHIP FIRM
- No Suit in a Civil Court Against a Third Party or Co-partner :- A partnership firm does not have any right to sue third party if firm is not registered.
- No Relief Partners for Set-off Claim :- A set-off claim is an equitable defence to the whole or a part of a plaintiff’s claim. An unregistered firm cannot file these claims.
- Third Parties Can Sue the Firm :- Even if a particular partnership firm is not registered under the law, a third party can file a legal case against the firm.
- No Legal Action Can be Taken by a Partner against a Co-partner :- This is because partners in an unregistered company are in no position to enforce any right.
RELEVANT CASE LAWS
Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd.AIR 1964 SC 1882
Facts: M/S Kajaria Traders (India) Ltd. and Messrs. Foreign Import and Export Association (controlled by Jagdish C. Gupta) collaborated to export manganese ore to Phillips Brothers (India) Ltd., New York. Each partner committed to providing a specified amount of manganese ore. They had an agreement that said that if they disagreed, they would go to arbitration. Later, Jagdish could not fulfill his part, and the company wrote to him, appointing an arbitrator named Mr. Kolah. The corporation requested that Jagdish either consent to Mr. Kolah’s arbitration or pick his own arbiter. However, he disagreed. On 28th March 1959, the company filed an application under Section 8(2) of the Indian Arbitration Act, 1940, asking for Mr. Kolah or another arbitrator. Jagdish filed an objection. After hearing the case between the Kajaria Traders and Jagdish, the Bombay High Court held in favor of Kajaria Traders.
Hence, Jagdish Chandra Gupta filed an appeal before the Supreme Court.
Issue: Whether the Court has the authority to appoint the arbitrator without the assent of the parties under Section 8(2) of the Indian Arbitration Act, 1940.
Whether the petition barred by Section 69(3) of the Indian Partnership Act of 1932 because the partnership was not registered?
Is the current process one to enforce a claim resulting from the parties’ contract?
Judgement: The court highlighted that the proceeding under Section 8 of the Indian Arbitration Act, 1940 originated from the arbitration clause, which is part of the partnership agreement.
As a result, the court decided that the continuing legal action attempted to enforce a contractual right, whether the entire contract or simply the arbitration clause was considered. By including an arbitration clause in the agreement, the court determined that the parties had already reached an agreement on resolving the dispute through arbitration. According to the court, “Since the arbitration clause formed a part of the agreement constituting the partnership it is obvious that the proceeding which is before the Court is to enforce a right which arises from a contract” . Whether one looks at the contract as a whole or just the arbitration clause, it is impossible to believe that the capacity to proceed to arbitration is not one of the rights based on the parties’ contract.
The terms “a right arising from a contract” in Section 69(3) of the Indian Partnership Act, 1932 are adequate in either sense to cover the current issues. Ejusdem Generis is Latin for “of the same kind.” Unless the situation necessitates otherwise, general terms should be given their natural meaning like all other words. However, when a general word is followed by particular words from another class, the general word may be assigned a restricted meaning from the same category. The court stated that when phrases indicating specific classes are followed by broad words, the application of Ejusdem Generis or Noscitur a Sociis is not always required.
The Supreme Court held that the words ‘other proceeding’ in S. 69(3) of the partnership act must receive their meaning and must be unaffected by words’ claim of set-off. Therefore, the appeal is allowed to rescind the decision of the Bombay High Court.
Haldiram Bhujiawala v. Anand Kumar Deepak Kumar(2000) 3 SCC 250
Facts: Shri Ganga Bishan, widely recognized as Haldiram, initially began the business of selling snacks such as namkeen, papads, and bhujia, operating under the trade name and trademark “Haldiram Bhujiawala”.
Over time, his sons also became involved in the business, and it became a partnership firm. In November 1997 one of the sons of Ganga Bishan tried to trademark “Haldiram Bhujiwala” which was already registered. The dispute then arose when grandson of Ganga Bishan tried to open a shop in the name of M/s Haldiram Bhujiawala at Arya Samaj Road, Delhi. The plaintiffs discovered that the defendants were using the ‘HALDIRAM’ mark in a way that could mislead consumers into believing there was an association or endorsement by the plaintiffs, thereby capitalising on the established reputation of the ‘HALDIRAM’S brand. The partnership firm of other sons of Ganga Bishan M/s Anand Kumar Deepak Kumar filed a suit asking the court for injunction against the appellants. The Trial Court gave the verdict in favour of M/s Anand Kumar Deepak Kumar. Delhi High Court dismissed the appeal of the Appellant.
The Appellants filed an application for rejection of the plaint filed by two plaintiffs, Anand Kumar Deepak Kumar trading as Haldiram Bhujiawala and Shiv Kishan Agarwal, on the ground that the 1st plaintiff was a partnership not registered with the Registrar of Firms on the date of suit i.e. on 10th December 1991 and that the subsequent registration of the firm on 29th May 1992 would not cure the initial defect. The plaintiffs have invested significantly in advertising and brand promotion, contributing to the brand’s high visibility and consumer trust. The defendants’ use of a similar mark threatens to dilute this trust and cause potential damage to the brand’s image and consumer base.
Issue: Whether Section 69(2) of Partnership Act, 1932 bars a suit by a firm not registered on the date of suit where permanent injunction and damages are claimed in respect of a trademark as a statutory right or by invoking Common Law principles applicable to a passing-off action?
Whether the words ‘arising from a contract‘ in Section 69(2) of Partnership Act, 1932 refer only to a situation where an unregistered firm is enforcing a right arising from a contract entered into by the firm with the defendant during the course of Its business?
Judgement: The court applied the principles of trans-border and spill-over reputation, acknowledging the realities of a global market where well-known brands enjoy recognition and goodwill that transcend geographical boundaries.
The Court observed Section 69(2) of Partnership Act, 1932 cannot bar the enforcement by way of suit by an unregistered firm in respect of a statutory right or a common law right.
They further observed that if the reliefs 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 Trademarks Act, 1999 and then it is not barred by Section 69(2) of Partnership Act, 1932.
The Court further said that the purpose behind Section 69(2) of Partnership Act, 1932 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 third party-defendant in the course of the firm’s business transactions.
The defendants were permanently restrained from using the ‘HALDIRAM’ mark or any other mark deceptively similar to ‘HALDIRAM’S’, effectively protecting the plaintiffs’ trademark rights and ensuring that the defendants could no longer exploit the plaintiffs’ established brand reputation.
The Court finally held that the suit was not barred by Section 69 (2) of Partnership Act, 1932 even if the right to be enforced does not arise from contract.
M/S Umesh Goel v Himachal Pradesh Cooperative Housing Society Ltd.(2016) 11 SCC 313
Facts: The Cooperative Group Housing Society (Respondent), issued a call for tenders to construct 102 dwelling units with a basement. An unregistered partnership firm (Appellant) submitted a bid in response, winning the contract at an estimated cost of Rs. 9.80 crores. The appellant was issued a letter of intent. On 09.08.1998 the appellant submitted its first bill for the construction of the compound wall etc. It is stated that there was some delay in getting the plan sanctioned, which according to the appellant, he was not responsible for the delay. Appellant approached Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking an injunction to prevent the Respondent from removing the Appellant from the worksite until the work completed by the Appellant was assessed by a Commissioner appointed by the Court. Arbitrator was appointed and both the parties presented assertions and counter-arguments to the arbitrator. On 05th May 2005, the arbitrator issued a decision, granting the appellant’s claim up to Rs. 1,36,24,886.08, with an additional interest rate of 12% from 01.06.2002 until the award date, and subsequent interest at 18% per annum from the award date until the payment date. Despite the arbitrator’s decision, the Respondent was dissatisfied and lodged an appeal with the Delhi High Court, which ultimately dismissed the appeal. Therefore, he approached the Supreme Court.
Issue: Whether expression other proceedings contained in Section 69(3) of the Indian Partnership Act, 1932 will include Arbitral proceedings and can be equated to suit filed in Court and thereby ban imposed against unregistered firm can operate in matter of arbitral proceedings?
Judgement: The appeal was filed at Delhi High Court by the Appellant, wherein, the court held that the award of the counterclaim in Arbitral proceedings was reversed as it is not reasonable in consideration to the specific provision under Partnership Act, due to the Court’s understanding, that Arbitral Proceedings is covered by the expression ‘other proceedings’ as under Section 69(3) of the Partnership Act. Consequently, the ban was imposed by the said section of Partnership Act on the appellant, which was also an unregistered firm at that point in time. The judgment of the high court was challenged by the appellant before the honourable Supreme Court of India. The prohibition does not extend to arbitration proceedings, and the Court rejected an argument challenging the maintainability of a counter claim of appellant in arbitration based on Section 69 of the Indian Partnership Act, 1932.
The judgment clearly held that under Section 69(3) of the Partnership Act, the phrase ‘other expression’ doesn’t include ‘Arbitral Proceedings’. Furthermore, the ban imposed under the said section will not apply to Arbitral proceedings and the Arbitration Award.
PRESENT CASE
Q. 3/2022. B and C cannot file a suit against A to compel him to consent to the registration of the firm. Section 69 of the Indian Partnership Act, 1932, prevents them from suing a partner to enforce contractual rights in an unregistered firm. Since registration is voluntary, unless there is a contractual obligation to register, A cannot be legally compelled to give his concurrence for registration. B and C can explore alternative remedies, such as reconstituting the firm without A.
