Dissolution of unregistered firm

0n 20/02/2009 the apex court has held that a suit for dissolution of can be filed by a partener of unregistered firm. the supreme court declared maharastra amendment made in 1984 in partenership Act  is unconstitutional. Sub-section 2A which was introduced by the Maharashtra

Amendment 1984 states as follows :

                  "(2A) 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

  Provided that the requirement of registration of
           firm under this sub-section shall not apply to the suits or   proceedings instituted by the heirs or legal  representatives of the deceased partner of a firm for accounts of a dissolved firm or to realize the property of  a dissolved firm."

the supreme court held that  "a partnership firm, whether registered or unregistered, is not a distinct legal entity, and hence the property of the firm really belongs to the partners of the firm. Sub-section 2A virtually deprives a partner in an unregistered firm from recovery of his share in the property of the firm or from seeking dissolution of the firm."

The court said that :

"The effect of the Amendment is that a partnership firm is allowed to come into existence and function without registration but it cannot go out of existence (with certain exceptions). This can result into a situation where in case of disputes amongst the partners the relationship of partnership cannot be put an end to by approaching a court of law. A dishonest partner, if in control of the business, or if simply stronger, can successfully deprive the other partner of his dues     from the     partnership. It could result in extreme hardship and injustice. Might would

be right. An aggrieved partner is left without any remedy whatsoever. He can neither file a suit to compel the mischievous partner to cooperate for

registration, as such a suit is not maintainable, nor can he resort to arbitration if any, because the arbitration proceedings would be hit by Section 69(1) of the Act (Jagdish Chandra Gupta vs. Kajaria Traders (India) Ltd. AIR 1964 SC 1882)."
 

The court said that:

"The primary object of registration of a firm is protection of third parties who were subjected to hardship and difficulties in the matter of

proving as to who were the partners. Under the earlier law, a third party obtaining a decree was often put to expenses and delay in proving that a

particular person was a partner of that firm. The registration of a firm provides protection to the third parties against false denials of partnership

and the evasion of liability. Once a firm is registered under the Act the statements recorded in the Register regarding the constitution of the firm are conclusive proof of the fact contained therein as against the partner. A partner whose name appears on the Register cannot deny that he is a partner except under the circumstances provided.   Even then registration of a

partnership firm is not made compulsory under the Act. A partnership firm can come into existence and function without being registered. However, the Maharashtra Amendment effects such stringent disabilities on a firm as

in our opinion are crippling in nature. It lays down that an unregistered firm cannot enforce its claims against third parties ...."

thus the court held that : the restrictions placed by sub-section 2A of Section 69 introduced by the Maharshtra Amendment Act, for the reasons given above, are arbitrary and of excessive nature and go beyond what is in the public interest. Hence the restrictions cannot be regarded as reasonable."

"Since sub-section 2A of Section 69 as introduced by the Maharashtra Legislature clearly violates Articles 14, 19(1)(g) and 300A of the Constitution, it is in our opinion ultra vires and is hence declared unconstitutional."

Thus the Supreme Court's decision gives a great relief to business comunity trading through an unregistered firm.

congratulations to business comunity.

- Dr. V.N. Tripathi, Advocate, Allahabad High Court.

email dr.vntripathi@yahoo.com mob.: 9839527421, Ph.: 0532-2545245