Suits By Unregistered Partnership Firms : Maintainable ?

Article by Sonam Malik, Associate at Aekom Legal and Lokesh Dhyani, Partner at Aekom Legal.

Introduction

It has been disputed since long, whether an unregistered partnership firm can file a suit albeit the long standing provisions of the Indian Partnership Act, 1932[“Partnership Act”]which clearly bars the unregistered partnership firm to file suit in any court. In this regard, there have been various contradictory judgement. Through this article the writer has made an effort to analyze the current legal standing of such suits.

Legal Provision

As per section 69(2) of the Partnership Act a firm which is unregistered cannot file a suit i.e. an unregistered partnership firm cannot file a suit against a third party for enforcing its rights arising from a contract or other legal rights. Accordingly, if an unregistered partnership firm wants to file a suit against a third party for any dispute, it cannot do so unless it is registered.

Additionally, section 69 of the Partnership Act prohibits an unregistered partnership firm:

• from claiming a set-off or taking any other legal action to enforce their contractual rights; and
• to file a lawsuit against its partners, forbidding suits for any contractual rights or rights arising from the Partnership Act.

Meaning of Suit 

Before moving forward we shall first analyse the term “suit”. Since the term suit is neither defined in the Partnership Act, 1932 nor in any other statute reference is made to legal dictionaries and the judgement in this regard.

The Black Law’s Dictionary, 4th edition defines suit as “A generic term, of comprehensive signification, and applies to any proceeding by one person or persons against another or others in a court of justice in which the plaintiff pursues, in such court, the remedy which the law affords him for the redress of an injury or the enforcement of a right, whether at law or in equity.” 

Further, as observed by the Hon’ble Supreme Court of India in the case of Ethiopian Airlines v. Ganesh NarainSaboo (2011), ‘suit’ is a general term that encompasses all actions to be taken by a person to enforce a legal right that has been vested in them by law. This includes not only actions initiated by the presentation of a plaint but also other actions such as petitions, applications, appeals, and revisions. 

Similarly, in the landmark case of Hansraj Gupta & Others v. Dehra Dun-Mussoorie Electric Tramway Co. Ltd. (1932), the Privy Council held that a civil proceeding is instituted by the presentation of a plaint. The Privy Council noted that a plaint is a statement of the cause of action and the relief sought, and it is the document that initiates a civil proceeding in a court of law. However, it is important to note that the definition of ‘suit’ has evolved over time, and it is now understood to encompass a broader range of legal actions beyond the presentation of a plaint. 

Therefore, it would be safe to say that any action taken by a firm to enforce its legal rights in a court for some legal remedy shall be treated as a suit.

Whether unregistered partnership firms are strictly prohibited to file suits under the Indian Partnership Act of 1932 or can there be a way around it?

As is evident from the language of the section 69(2) of the Partnership Act, it is clear that registration is required to give the firm right to file a suit, making registration a pre-requisite 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.

As can be seen from various below mentioned  judicial precedents, section 69 (2) of the Partnership Act has been construed liberally.

In the case of HaldiramBhujiwala&Anr. Vs. Anand Kumar, Deepak Kumar &Anr. [C.A. No. 1786 of 2000 [Arising out of SLP(C) No. 1048 of 2000], the courts prescribed an exception to Section 69(2). The Supreme Court held that it is the statutory right of an unregistered partnership to file a lawsuit for infringement of its trademark. The court ruled that the lawsuit filed by the unregistered partnership cannot be barred under the provision of Section 69(2) since 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.

Further, in the previous landmark cases of 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], it was ruled that following conditions must be satisfied in order to invite the bar to the lawsuit:

• The contract in question is entered into by the firm with a third party and in the course of its business dealings; and
• the contract is entered into for the enforcement of a statutory right or a common law right.

Similarly, in the case of M/s. Bestochem Formulation Vs. Dinesh Ayurvedic Agencies, it was held that s. 69 (2) will not apply to a passing off action as the suit is based on tort and not on contract.

The Supreme Court in the recent judgment of Shiv Developers through its partner Sunilbhai Somabhai Ajmeri Vs Aksharay Developers [2022 SCC Online SC 114] concluded the issue by stating the following principles:

(i) 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 with the third-party defendant.

(ii) 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. The names of the partners of the firm should be made known to such third parties who conduct business with the partners before they do so.

(iii) 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).

From the aforesaid judgement it is apparent that the prohibition under section 69(2) of the Partnership Act is not absolute but rather comes with its own peculiarities i.e. 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.

Whether the prohibition under section 69 of the Partnership Act extends to Insolvency and Bankruptcy Code, 2016 (“IBC”) as well?

As per Section 6 of the IBC, any Person who is a financial creditor, an operational creditor or the corporate debtor itself may initiate the CIRP.

Under section 3 (23)of the IBC, the expression “person” has been defined to include not just natural persons but also other entities such as firms, companies, Partnership firms, and associations of persons or individuals. This means that partnership firms, whether registered or unregistered, are considered to be “persons” under the IBC.

Accordingly, under the IBCa partnership firm is considered a corporate entity and is therefore eligible to undergo the CIRP process. The CIRP process can be initiated by the partnership firm itself, or by any of its financial creditors or operational creditors, by filing an application with the Hon’ble NCLT. However, filing of proceedings by an unregistered partnership firm under IBC is a pretty disputed subject as of now.There has been a myriad of conflicting judgement on this issue.

In one of the recent judgement, Kochi Bench rejected an application filed by an unregistered partnership firm on the grounds of Section 69(2) of the Partnership Act, 1932 while the New Delhi bench admitted the application filed by an unregistered partnership firm.

In this respect, the various benches of NCLT have diverse views as follows:

In the matter of Bangalore Sales Corporation v Sark Spice Products Pvt. Ltd. [CP (IBC)/37/KOB/2022], the bench has held that an unregistered partnership firm cannot institute insolvency proceedings under IBC. 

Section 69(2) of the Partnership Act, 1932 prohibits an unregistered partnership firm or any of its partners from initiating legal action against any third party. The term “court” is defined in Section 3 of the Indian Evidence Act, 1872, which includes all judges and magistrates and individuals authorized by law to take evidence, with the exception of arbitrators. Therefore, this Tribunal is also considered as a court under this definition. Proceedings before the Tribunal are deemed as a suit and are subject to Section 69(2) of the Partnership Act, 1932. Consequently, an unregistered partnership firm is not entitled to initiate insolvency proceedings under the Insolvency and Bankruptcy Code. 

In the matter of Preet Shuttering Store vs. M.I. Build tech Private Limited[CP (IB)-300/ND)/2021], the New Delhi Bench’s decision to admit an application filed by an unregistered partnership firm despite the bar under Section 69(2) of the Partnership Act, 1932 is based on the interpretation that the provision only applies to “suits” and not to proceedings under the IBC. They relied on the judgement of Shree Dev Chemicals Corporation vs. Gammon India Ltd to support their interpretation. 

The NCLT, in the case of M/s. Shree Dev Chemicals Corporation Vs. Gammon India Limited [CP (IB) No. 3637/MB.IV/2018], affirmatively answered the question and stated that the unregistered partnership firm will have a right to file an application under Section 9 of the Code and it was further stated that Section 69(2) of the Indian Partnership Act, 1932 applies only to suit and not to proceedings. Thus, the bar will not apply to the applications filed under IBC, as they are in the nature of proceedings and not suits.

Further, the case Ramdev Infra vs. CMM Infra projects Limited (2022) [MANU/NC/4613/2022] held that an application under Section 9 will not be called as a suit. The proceeding initiated under Section 9 of the code does not fall under the ambit of Section 69(2) of the Act, applies to suits and, therefore, cannot apply to proceedings under the IBC.

Further in the matter of RourkelaSteel Syndicate vs. Metistech Fabricators Private Limited[CP (IB) No.14/CB/2021], the NCLT Cuttack bench has also rejected an application filed by an unregistered partnership firm on the ground that it was barred by Section 69(2) of the Partnership Act. In this regard, an appeal was filed before the Hon’ble NCLAT for further adjudication of the case that whether an unregistered partnership firm can file the proceedings under IBC or not. Accordingly, the NCLAT held that IBC applications are not suit, hence bar of s.69(2) of Partnership Act not attracted. The bench found that Section 69(2) of the Indian Partnership Act, 1932, which deals with the rights of unregistered partnership firms, is not applicable to an application filed under Section 9 of the IBC. The National Company Law Tribunal (NCLT) had rejected the application on the grounds that it was barred by Section 69(2) of the Partnership Act, 1932. However, the bench held that the NCLT had made an error in treating the application as akin to a suit. The bench explained that Section 69(2) of the Partnership Act is not applicable to an application under Section 9 of the IBC because it is not a suit and therefore Section 69(2) does not apply. The bench further noted that the NCLT had erroneously rejected the Section 9 application on the grounds that it was barred by Section 69(2) of the Partnership Act.

Thus, in regard to the recent NCLAT ruling it can be said that an unregistered partnership firm is not prohibited from filing an application under the IBC and the provisions of the Partnership Act do not apply to such applications. 

Whether the prohibition under section 69 of the Partnership Act extends to Arbitration And Conciliation Act, 1996 as well?

Since, section 69 puts a bar on the institution of suit or any other proceeding by an unregistered firm, it is pertinent to know whether arbitral proceedings come under the ambit of the expression“suit or any other proceeding”.

In the case ofUmesh Goel v. Himachal Pradesh Cooperative Group Housing Society Limited, (2016) (11 SCC 313) and the Madras High Court in M/s. Jayamurugan Granite Exports v. M/s. SQNY Granites, (2015 4 LW 385), both of which held that arbitral proceedings shall not come under the expression ‘other proceedings’ of Section 69(3) of the Partnership Act and that the ban imposed under Section 69 can have no application to arbitration proceedings as well as an arbitral award under Section 11 of the Arbitration Act.

Similarly, in the case of Kamal Pushp Enterprises vs. D.R. Construction Co. (2000) 6 Supreme Court Cases 659, the apex court held that application of S. 69 is only limited to the enforcement of right arising from a contract by an unregistered firm by instituting a suit or other proceedings in the court and arbitral proceedings cannot be treated as a suit or other proceeding to enforce any rights arising out of a contract. The court further held that s. 69 does not prohibit an unregistered firm from defending an arbitration proceeding initiated by the opposite party.

Further, recently in the matter of Md. Wasim and Anr. Vs. M/s Bengal Refrigerationand Co. and Ors. (A.P. No. 27 of 2022) the Calcutta High Court has held that dispute of unregistered partnership firm can be referred to Arbitration, bar under section 69 of Partnership Act not applicable.

 Conclusion

Though on skimming through the provisions of Section 69 of the Partnership Act, 1932 it seems that the bar is absolute but as observed from the cases it is not so. The said provision bars the suit by or on behalf of the company against a third person if the company is not registered at the time of institution of the suit. However, if the suit instituted deals with the right which does not arise out of contractual relationship but through common law, statute or a tort then it is not barred by section 69. Further, section 69(2) of the Partnership Act is not applicable to an application under the IBC because it is not a suit.Moreover, section 69 only puts a bar on the suit or other proceeding and since arbitral proceeding is not covered under the ambit the expression suit or other proceeding. Hence, section 69 will not impose a bar on arbitral proceedings.