Introduction
The status and capability of unregistered partnership firms to initiate legal suits has been a topic of considerable debate in the Indian legal sphere. Central to this discussion is Section 69 of the Indian Partnership Act, 1932, which outlines the legal capabilities and constraints of unregistered firms. This article delves into the intricacies of Section 69, providing an analysis of its rationale, exceptions, and applicability.
The Provision of Section 69
As per Section 69(2) of the Partnership Act, an unregistered partnership firm is prohibited from filing a suit against a third party to enforce rights arising from a contract or other legal rights. This means that if such a firm wishes to file a suit against a third party for any dispute, it must first be registered.
Section 69 of the Act further prohibits an unregistered firm from claiming a set-off or initiating any other legal action to enforce their contractual rights. Moreover, it bars the firm from filing a lawsuit against its own partners, forbidding suits for any contractual rights or rights arising from the Partnership Act.
Understanding the Term “Suit”
Before we delve further, it’s critical to understand what constitutes a “suit.” The term is not explicitly defined in the Partnership Act, 1932, or in any other statute, so we turn to legal dictionaries and judgements for clarification.
The Black Law’s Dictionary defines a suit as a comprehensive term encompassing any proceedings initiated by a person or persons against others in a court of justice to enforce a legal right that has been vested in them by law. This includes not just actions initiated by the presentation of a plaint but also other actions such as petitions, applications, appeals, and revisions.
Therefore, any action taken by a firm to enforce its legal rights in a court for some legal remedy is considered a suit.
The Rationale and Exceptions to Section 69
Section 69(2) of the Partnership Act mandates registration as a prerequisite for a firm to file a suit, making it an essential step for initiating lawsuits on behalf of the firm or against a third party. If the names of the partners are not recorded in the Register of Firms, lawsuits cannot be initiated. This is because such lawsuits are directly related to the contracts that were made by the unregistered partnership firm during its normal course of business.
However, judicial precedents suggest that the restriction imposed by Section 69(2) is not absolute but has its peculiarities. For instance, any suit other than one arising from contractual rights in the normal course of business dealing can be filed even by an unregistered partnership firm.
Summary of the exceptions to Section 69(2) of the Indian Partnership Act, 1932, based on various judgments:
- Haldiram Bhujiawala & Anr. Vs. Anand Kumar, Deepak Kumar & Anr. [C.A. No. 1786 of 2000]: In this case, the Supreme Court allowed an exception to Section 69(2). The court held that an unregistered partnership has the statutory right to file a lawsuit for infringement of its trademark. The lawsuit filed by the unregistered partnership cannot be barred under the provision of Section 69(2) as it was not enforcing any contractual right against third parties in the course of the firm’s business transaction, but was claiming its statutory rights based on the common law principle.
- Raptakos Brett & Co. Ltd. v. Ganesh Property (1998) [CASE NO.:Appeal (civil) 4657 of 1998] and Purushottam and Anr. v. Shivraj Fine Art Litho Works (2007) [CASE NO.:Appeal (civil) 4092 of 1998]: These cases stipulated that for the prohibition of Section 69(2) to apply, the following conditions must be satisfied:
-
-
- The contract in question is entered into by the firm with a third party and in the course of its business dealings.
- The contract is entered into for the enforcement of a statutory right or a common law right.
-
- M/s. Bestochem Formulation Vs. Dinesh Ayurvedic Agencies: In this case, it was held that Section 69 (2) will not apply to a passing off action, as the suit is based on tort and not on contract.
- Shiv Developers through its partner Sunilbhai Somabhai Ajmeri Vs Aksharay Developers [2022 SCC Online SC 114]: In this recent judgement, the Supreme Court concluded that:
-
-
- The contract by the unregistered firm referred to in Section 69(2) must be one entered into by the plaintiff firm as well as the third-party defendant during the course of the plaintiff firm’s business operations.
- The legislature interpretation for the usage of words “arising out of a contract” in Section 69(2) to refer to a contract entered into in the course of business transactions by the unregistered plaintiff firm with its defendant customers.
- Any and every contract mentioned in the plaint as the source of title to an asset controlled by the firm is not subject to Section 69(2).
-
These cases show that the prohibition on lawsuits by unregistered partnership firms under Section 69(2) has been interpreted liberally by the courts, and there are exceptions to the rule.
Applicability to the Insolvency and Bankruptcy Code, 2016
An interesting question arises concerning the applicability of Section 69 of the Partnership Act to the Insolvency and Bankruptcy Code, 2016 (IBC). The IBC considers partnership firms, whether registered or unregistered, as “persons” under its provisions. Therefore, they are eligible to undergo the Corporate Insolvency Resolution Process (CIRP) as outlined in the IBC.
Conclusion
The prohibition against suits by unregistered partnership firms, as defined by Section 69 of the Indian Partnership Act, 1932, is a complex issue. While the Act clearly bars such firms from filing suits against third parties or its own partners, there are exceptions, as evidenced by various judicial precedents. Furthermore, the application of Section 69 extends to other legal frameworks, such as the Insolvency and Bankruptcy Code, 2016, where partnership firms are considered “persons” eligible to undergo the Corporate Insolvency Resolution Process.
It is worth noting that while the Act seems to discourage the operation of unregistered firms by restricting their legal capabilities, it does not invalidate the existence or activities of such firms. In fact, in certain circumstances, as elucidated by the courts, unregistered firms can engage in legal actions.
In essence, the legal standing and capabilities of unregistered partnership firms in India represent a complex intersection of statute, case law, and legal interpretation. As always, legal counsel should be sought to navigate the complexities of this issue, especially since the interpretation of laws can evolve over time.
Finally, while unregistered partnership firms may operate with some legal restrictions, the benefits of registration – including the ability to file suits and enforce contractual rights – make it a worthwhile consideration for firms engaged in any form of business dealings.
written by Parthvi Patel, United World School of Law
