Legal Question in Credit and Debt Law in India

04.03.2015

Dear Sir / Madam,

If the partnership firm does not choose to get itself registered, then the firm as well as the partners are under the disabilities which are extremely inconvenient. There is no direct compulsion but a pretty strong persuasive pressure to come on the register of firms. No member of an unregistered firm can enforce his rights under the partnership contract against either the firm or any present or past member of it, nor can the firm sue its customers on their contracts.

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. The bar applies to enforcement of (a) right arising out of a contract, 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.

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.

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.

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 another v/s M/s Ishar Dass Chaman Lal and Others, 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 Sharma & Another v/s V K Sharma and Another, 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.

Thus, in view of the above, in my opinion legal proceedings for the dissolution of an unregistered firm can continue in the Court of Law.

Regards,