Unregistered firm
shilpaja
(Querist) 16 July 2012
This query is : Resolved
what will be the status of unregistered firm while filing IT Returns? whether on the name of unregisterd firm IT returns can be filed? what are the compliances which are to be compled with the Government or concerned body, in the case of unregisterd firm?
A V Vishal
(Expert) 16 July 2012
There is no change in status of firm be it registered or unregistered. As for the second part of your query, be specific regarding the compliances you wish to make.
shilpaja
(Querist) 16 July 2012
many thanks for consideration.
More correctly i want to know about whether there are any compliances (like a Company haves with the Central Govt.)annualy with CG or state gov.? also regarding rights and liabilities of the partners at the time of dissolution when the firm is unregistered? whether it can sue? what will be the prejudice of unregistered status of the firm?
R.K Nanda
(Expert) 16 July 2012
Best is to get the firm registered as u may face problems in future.
A V Vishal
(Expert) 16 July 2012
EFFECT OF NON REGISTRATION
Bar on suits by unregistered firms
Sub-section (1) of section 69 of the Act bars suits by partners against an unregistered firm or against any person alleged to be or to have been a partner of such a firm [29] . The bar applies to enforcement of (a) right arising out of a contract [30] , or (b) right conferred by the partnership Act. On the other hand, sub-section (2) of section 69 of the Act bars suits for enforcement of a right arising out of a contract by or on behalf of the unregistered firm against ‘third parties’. The operation of section 69 would extend to the suit in which a partner sues his co-partner or sues the firm to enforce any right arising from the contract between the partners [31] .
The Supreme Court has held that this section is mandatory in character and its effect is to render a suit by plaintiff in respect of a right vested in him or acquired by him under a contract which he had entered into as partner of an unregistered firm, whether existing or dissolved, is void [32] . In other words, a partner of an erstwhile unregistered partnership firm cannot bring a suit to enforce a right arising out of a contract hit by the provision of section 69 [33] . However a suit by a partner to recover money from a third person is not barred by section 69 of the Act, if the transaction, involved in the suit, is in his own name only and the defendant had no notice of the existence of the partnership [34] . The conditions required by this section are mandatory, and the bar of the section applies both to suits by the firm as well as on behalf of the firm [35] .
In Jagdish Chandra Gupta’s case [36] , the Constitution Bench approved of a liberal and full meaning being assigned to the phrase ‘other proceedings’ in Sub-section (3) of section 69 of the Act untrammelled by the preceding words ‘a claim of set-off”. The Court refused to countenance the plea for interpreting the words ‘other proceedings’ ejusdem generis with the preceding words ‘a claim of set-off’. In M/s. Shreeram Finance Corporation [37] calls for the effect of bar created by Section 69 being determined by reference to the date of institution of the suit and not by reference to any subsequent event. In Delhi Development Authority’s case [38] , the Court held section 69 of the Act is applicable to an application under section 20 of the Arbitration Act, 1940 as such an application (under the scheme of that Act) would be included within the meaning of ‘other proceedings’ in Section 69(3) of the Act.
Section 8 of the above English Act is relevant and it speaks of the rights of that defaulter under or arising out of any contract made or entered into by or on behalf of such defaulter is in relation to the business for which particulars were required to be furnished for carrying on that business. [39] The above provision clearly signifies that the right that is sought to be enforced by the unregistered firm and which is barred must be a right arising out of a contract with a third party-defendant in respect of the firm’s business transactions.
For the purpose of deciding the point about the words ‘arising from a contract’ in section 69(2), it is necessary to go into the question as to what the legislature meant when it used it.
In this context it is important to refer to the Report of the Special Committee (1930-31) which examined the draft Bill and made recommendations to the legislature.
Before going into the above report of the special committee which preceded the Act, it will be necessary to refer to the case in Commissioner of Income Tax, AP v Jayalakshmi Rice and Oil Mills Contractor Co. [40] where the Supreme Court refused to refer to this very report for construing section 59 of the Act. But, that decision is no longer good law as it was clearly dissented on this aspect in the judgment of the Constitution Bench in RS Nayak v AR Antulay [41] . In number of later judgments, the court referred to the reports of committees or commissions. [42]
The Constitution Bench of the Supreme Court for understanding the legislative intent relied upon Hyderabad Industries Ltd v Union of India [43] . The English Law has changed completely after Pepper v Hart [44] in favour of admissibility of such material.
A restricted view was no doubt expressed in PV Narasimharao v State [45] that such reports can be looked into for the purpose of knowing the historical basis or mischief sought to be remedied, but not for construing the provision unless there is ambiguity.
Even going by this restricted view, we find that there is considerable ambiguity in section 69(2) (unlike the English Statutes of 1916 and 1985) as to what is meant by the words ‘arising out of a contract’ in as much as the provision does not say whether the contract in section 69(2) is one entered into by the firm with the defendant or with somebody else who is not a defendant, nor to whether it is a contract entered into with the defendant in business or unconnected with business. Hence, it should thus be permissible to look into the report even for purpose of construing section 69(2).
A question has arisen whether the words ‘enforce a right under a contract’ would include rights arising out of contracts with third parties not in connection with the day-to-day business or commercial transactions entered into by the unregistered firm. The view was expressed by the Supreme Court in Raptakos Brett Co Ltd v Ganesh Property [46] the Court held that the right to evict a tenant was not a right arising from a contract but was a statutory right under the Transfer of Property Act, 1882. The eviction proceeding was therefore not barred.
The Committee further suggested that Section 69 of the Act, as it stands presently, puts a partner in an unenviable situation of first suing for dissolution, before he could proceed to recover monies under the contract. The bar on suits should be restricted only to suits in respect of rights arising out of contracts entered in the course of business. Accordingly, it is recommended that amendments in the Act, on the lines suggested by the Law Commission of India, be initiated.
The Supreme Court following Raptakos Brett Co Ltd v Ganesh Property [47] in Haldiram Bhujiwala v Anand Kumar Deepak Kumar [48] held that a suit to prevent infringement of trademark is not barred by the section whether the firm is registered firm or not. The Court said that 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 defendant from passing off the defendant’s goods as those of the plaintiff by using the plaintiff’s trademark and for damages is an action at common law and is not barred by Section 69(2).
But before the bar under Section 69 can be invoked by the defendant the defendant needs to establish that the person suing is a partner of a partnership firm within the meaning of Section 4 of the Act.
NON-REGISTRATION OF THE PARTNERSHIP FIRM HAS NO LEGAL BEARING ON THE CRIMINAL CASE
The menace of bouncing cheques has been tackled by an amendment to the Negotiable Instruments Act, 1881, providing for imprisonment of the offender and victims can approach courts under Section 138 of the Negotiable Instruments Act, 1881.
However, so far as a partnership firm is concerned, its rights would depend upon its legal status. In a recent case, the Karnataka High Court considered this issue in the case of a complaint filed by an unregistered firm Beacon Industries v Anupam Ghosh [49] . After receipt of the complaint filed by Beacon (revision petitioner in the aforesaid case), the Trial Court at Bangalore dismissed the complaint by holding that there was a bar under section 69 of the Act and that an unregistered firm could not prosecute any person or a firm.
The High Court observed that even a plain reading of section 69(2) of the Act, left no scope for doubt that what was barred by the said section was the institution of a suit. The court further observed that enforcing a right arising from a contract or conferred by the Act and suing, as a partner in a firm against the firm or any partner in the firm would not be possible unless the firm was registered firm.
The High Court remarked that a careful reading of section 69(2) of the Act clearly showed that an unregistered partnership firm was barred from filing a civil suit, while there was no such bar so far as filing of a private complaint was concerned.
The Court noted that in the case of a bounced cheque, there was purely criminal liability on the part of the person who had issued the cheque. The Court held that even if the cheque had been issued by a partner of an unregistered firm for a legally recoverable debt and if such a cheque was dishonoured, it would amount to a criminal liability.
Thus the contract by the unregistered firm referred to in section 69(2) must not only be one entered into between the firm and the third party-defendant but must also be one entered into by the plaintiff firm in the course of the business dealings of the plaintiff’s firm with such third party-defendant [50] .
DISPUTE RESOLUTION AND NON REGISTRATION
Prior to the Arbitration and Conciliation Act, 1996, the law was settled. An application under section 20 of the Arbitration Act, 1940 could not be filed to enforce ‘a right arising from a contract’ in respect of an unregistered firm; as it was barred by the provisions of section 69(2) of the Act [51] .
By its decision in Jagdish Chandra Gupta v Kajaria Traders (India) Ltd [52] , the Supreme Court had settled the law. A clause in a deed of partnership provided that in case of dispute between the partners; the matter will 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 and the Court observed that
“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 parties. The word of section 69(3) or other proceedings to enforce a right ‘arising from a contract’ are sufficient to cover the present matter”.
If arbitration proceedings were allowed, unregistered firm would, by providing for arbitration in the partnership deed, to escape the disability contained in the section.
But the Supreme Court in Smt. Prem Lata and anothers v M/s Ishar Dass Chaman Lal and Others [53] , opined that proceedings under clause (a) and (b) of sub section (3) of section 69, could be referred to arbitration and the bar of section 69 is not applicable then.
In K.L. Verma and Anr .v Shri V.K. Sharma and Anr [54] , the appellant and the respondent were partners. There having arisen certain disputes between the parties, appellant filed a suit for dissolution and rendition of accounts of the partnership. On being served with summons in the suit, the respondent filed an application under section 34 of the Arbitration Act stating inter alia that as the matter in dispute between the parties was covered by an Arbitration Agreement, the suit cannot proceed and was liable to be stayed. The Court allowed this application and stayed the proceedings in the matter. After the proceedings were stayed, the appellant filed application under section 20 of the Arbitration Act for filing the Arbitration Agreement in Court and for reference of disputes to the Arbitrator. In the written statement besides other objections one of the objections taken by the respondent was that as the partnership was not registered under the provisions of the Act, the suit was not maintainable and was barred under section 69 of the said Act. The court observed that a bare reading of Clause 2(a) of section 69 (3) shows that a suit to enforce a right to sue for dissolution and rendition of accounts is not barred by provisions of section 69 of the Act and even if the firm is not registered and the person suing has not been shown as a partner of the firm, the partner can still enforce his right to enforce dissolution of firm and rendition of accounts irrespective of the bar under section 69 (1) of the Act.
In U.P. State Sugar Corporation Ltd. v Jain Construction Co. and Anr [55] , an agreement was entered into between parties for execution of certain civil works in a unit belonging to appellant. On a dispute having arisen between parties, application was filed by the respondent for appointment of an arbitrator, which was dismissed on ground that same was not maintainable in view of section 69 of the Act, as respondent firm was not registered partnership firm. Appeal was however allowed by High Court on ground that parties could avail appropriate remedy to relegate as Arbitration & Conciliation Act, 1996 had come into force. The Supreme Court opined that it is true that under section 69 arbitral proceedings would not be maintainable at instance of an unregistered firm. Impugned judgment of High Court held was unsustainable.
The Court held that if the firm is not a registered one, the application for appointment of an arbitrator both under the 1940 Act and the Arbitration and Conciliation Act, 1996 was not maintainable. Reliance, in this connection, had been placed on Firm Ashok Traders and Another v Gurumukh Das Saluja and Other [56] . The same has been held in Jagdish Chandra Gupta v Kajaria Traders (India) Ltd [57] .
In Firm Ashok Traders and Anr. v Gurumukh Das Saluja and Ors [58] , here the dispute was among 12 persons who were, or are alleged to be, or claim to be partners in the firm M/s
Ashok Traders. The registration of the partnership deed showed seven partners. The new partners were added and the same was not registered. The dispute arose amongst partners.
The civil suit was filed by one Group of partners, which was held not be maintainable in view of section 69 (3) of the Act, as name of partners were not been shown in Register of Firms as a partner of the firm. Further an application was filed under section 9 of Arbitration and Conciliation Act, 1996 for appointment of receiver, to take charge of business of firm, which being hit by section 69 (3) was dismissed. The issue was whether enactment by section 69 of the Act, does or does not affect maintainability of application under Section 9 of Arbitration and Conciliation Act, 1996?
On the question of maintainability of application under section 9 of Arbitration and Conciliation Act, 1996 as moved by a partner of an unregistered firm or by a person not shown as a partner in the Register of Firms, the High Court, for upholding the maintainability, relied on the decision of this Court in Kamal Pushpa Enterprises v.D.R. Construction Company [59] . The learned counsel for Group “B” argued that Sub-sections (1) and (2) of section 69 of the Act strike at the very root of the jurisdiction of the Court to entertain a suit to enforce a right arising from a contract, if the applicability of section 69 is attracted. By virtue of Sub-section (3), the bar enacted by Sub-sections (1) and (2) applies also to a claim of set-off or ‘other proceedings to enforce a right arising from a contract’ which, includes a proceeding commencing on an application under section 9 of the Arbitration & Conciliation Act, 1996. The right arising from the partnership deed or conferred by the Partnership Act is being enforced in the arbitral tribunal; the Court under section 9 of the Arbitration & Conciliation Act, 1996 is only formulating interim measures so as to protect the right under adjudication before the arbitral tribunal from being frustrated. Section 69 of the Act has no bearing on the right of a party to an arbitration clause to file an application under section 9 of the Arbitration & Conciliation Act, 1996.
The provisions of section 69(3) are not applicable to proceeding which arises from the filing of an award [60] . Once the matter is referred to an arbitrator without intervention of the Court, and so long as the award is given, the Court never comes into picture. The involvement of the Court comes, for the time, when the award is filed by the arbitrator. So long as the proceedings remain with the arbitrator section 69 cannot be put forward [61] .
In Kamal Pushpa Enterprises v D.R. Construction Company [62] , the Supreme Court held that the bar under section 69 of the Act is not applicable at the stage of enforcement of the award by passing a decree in terms thereof because the award crystallises the rights of the parties and what is being enforced at that stage is not any right arising from the objectionable contract.
So the law has taken a turn to which not all would approve of. The critics welcomed the decision of Firm Ashok Traders [63] as laying down further disability and thus making registration even more urgent. But now though a suit is not maintainable in a Court of law but arbitration proceeding is not hit by the bar. So a short cut has been given to the partnership firms which is un- called for. The report of the Special Committee which though not made registration mandatory but intended that any business not for very short duration and too small; be registered has been not kept in mind while deciding Firm Ashok Traders.
