Registration of Firms and Effect of Non Registration

By | April 20, 2020
Registration of Firms and Effect of Non Registration

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Registration of Firms and Effect of Non-Registration are two important paradigms of Chapter 7 of the Indian Partnership Act, 1932. It is not mandatory for a firm to get registered, and the process is also fairly simple. But, the consequence of non-registration takes away the opportunity to enforce the contractual or legal rights.

Introduction

Firms formed under the Indian Partnership Act, 1932 (hereinafter called “the Act”) have to be statutorily registered so as to be legally certain rights that have been guaranteed under the law. As it would be shown later, it grants recognition to the legal entity of the firm and thus provides a solid legal personality for getting the right to contest along with being represented in the court of law.

If the registration process is not followed, then the consequences of having a legal personality for the court purposes would not follow. Thus it can deprive the firm of addressing their rights. In the coming article, the legal nuances and the procedure for registration as provided under the statute would be discussed. The legal effect of non-registration would also be provided in the latter part of the article.

I. Registration of Firms

An application of registration has to be sent to the Registrar of Firms situated at the Place of Business where the firm is situated. All the details pertaining to name, principal place of business, other such places, date of joining of a partner, permanent address of partners, duration of firm. Each person (or the agent authorised by them) is bound to sign the statement as well.[1]

A controversy had arisen in the past about usage of identical and similar names by the firms. Since no such restriction exists in the Act as it is found in the Companies Act, the firms are usually considered free to use whatever name they feel like.[2] Registrar also cannot refuse registration on such a ground.[3] Usage of the word “India” is prohibited but the firms can very well use “Bharath”.[4]

Satisfaction of the Registrar

If the application requirements have been duly complied with to the satisfaction of the Registrar, a statement shall be entered in the Register of Firms.[5] This is the plain language of section 59 of the act that leads to the question regarding the extent of discretion which is vested with Registrar. These appear to be mere executive directions, and the language is clear enough to speak for itself.[6]

There have been views that he or she is a mere recording officer who only to enter the statements of registration in the register of firms. But the Supreme Court has authoritatively rejected this opinion. It is because the registrar has to satisfy that entire statutory mandate has been duly complied with.[7]

It is agreed that there is no provision in the Act which empowers Registrar to issue public notices, hold inquiries, examine witnesses on oath and ask for production of documents.[8] But, it has to be remembered that Registrar has to apply his or her mind as to the fulfilment of statutory requirements.[9] This is what is meant by the word “satisfied”.[10]

After Registration

Now, what happens after registration? The simple answer is that it would continue so as long as the firm exists and the registration is not cancelled in accordance with the law.[11] Also, the date when the application of registration was sent was prior to the date when the Registrar registers. It is thus deemed that registration is from the date of application.[12]

Also, compulsory registration is not provided for in the act as Chapter 7 of the act is silent as to compulsory registration.[13] This situation prevails all over India except in the State of Jammu and Kashmir.[14] It is because, in this state, a partnership deed has to be compulsorily registered.[15]

II. Effect of Non-Registration

Section 69 of the Act governs the consequences for not registering a firm as per the requisite provisions of law.[16] A brief perusal of the provision becomes necessary before delving into the deeper discussions regarding the same.

Section 69Effect of Non- Registration
Sub- Section 1A partner cannot sue an unregistered firm. In the register of firms, he or she must be shown as a partner. Whether the right emerges out of a contract or the act, it does not matter.
Sub- Section 2An unregistered firm and partners not shown in the register of firms cannot sue the third party. The right may arise from the contract.
Sub- Section 3The section also applies to set- off and other proceedings, except –

·         Dissolution of the firm- right to sue, accounts, the power to release property

·         Releasing property of insolvent partner by official assignee, receiver, the court[17]

Sub- Section 4Section does not apply-

·         Place of business not in the territory to which act applies

·         Value of Suit/ Set-off > Rupees 100; execution proceeding

Preliminary Information About the Section

Before moving to the substantive portion of the section, it is very important to understand what and how wide the provision is and the motive which the provisions plan to achieve.

Object

Supreme Court[18] has held that the main motive of including this provision making the registration of firms mandatory is to protect third parties from any hardship and inconvenience. Such trouble arises when they have to prove the existence of a partnership. Hence, they would be required to prove who the partners were. Thus, this provision empowers them to ask for the registered details.[19]

It also protects the third person from a false denial by the partner as to the existence of the partnership. It also protects them from evasion of liability.[20] It is because a paper proof of the details about partnership exists.  After all, the registered details act as conclusive proof about the existence of partnership.[21]

Nature

A bare reading of the provision would show that it is mandatory in nature. It is because of the far-reaching consequence that is being provided if the firm is nor registered. It would render a suit void that is filed by a plaintiff who claims to be a partner in case the firm is unregistered.[22]

In such a situation, it would not matter whether the right that the plaintiff claims are vested in him or her, or it has been acquired form a contract.[23] Also, it is not necessary for the firm to be functioning or to be dissolved to bring a suit. But, an unregistered firm whether working or dissolved, would not be able to enforce its rights within the ambit of section 69.[24]

This section is also penal. Thus, it has to be strictly construed.[25] Each and every condition that is mentioned in the section has to be mandatorily complied with. The bar that is provided would apply for the suits filed by the firm as well as on behalf of the firm.[26]

Scope

The mandatory condition of registration does not apply in case the suit filed is personal in nature. It means, only when the suit is on behalf of the firm or against the firm as an entity, the requirement of the registration of firm has to be strictly followed.[27]

This provision would also not apply in case of reconstitution of an existing firm as far as the spate registration process is concerned. The partners would have to prove still that they are a registered entity.[28]

Proof of Registration

For registering a firm, if the various claim that they have applied for the same and hence should be the given requisite status, it is not considered legally correct. Mere registration of a firm would not amount to registration per se.[29] Parties also indulge in the practice of getting the partnership deed registered under the Registration Act. But this also does not amount to registration.[30]

The law places the onus of proof upon the concerned plaintiff for showcasing the existence of partnership by providing the necessary documents of the register of firms showing that he or she is the partner of the firm.[31]

Thus; this question becomes a question of fact which the court has to investigate by considering all the possible aspects.[32] Such aspects include wholesome consideration of the facts proving the existence of the partnership. The court would also take into account the intention of the parties to get the firm registered.[33] Unless such requisites are not met, the claim by the parties would not be considered as maintainable.[34]

Inability of the Partner to file a suit against the firm

Sub-section 1 of the provision in the act[35] throws light on the effect of non-registration upon a partner or a person who alleges to be a partner. He or she would not be able to bring a suit against the firm, which is unregistered.[36] This sounds simple but has far-reaching consequences since the partner would not be able to enforce his or her rights. Those rights may arise from a contract or may even be guaranteed by the act.[37]

Hence, the primary requirement is for the firm to be registered. It must be understood that it is not illegal for the partnership firm to be unregistered. There is no penalty also, which is provided for not registering a firm.[38] The only reason that the act contains such provisions is to put the partners and the firm consequently in disabilities so as to encourage the process of registration.[39] It means there is no compulsion but pressure of course to register.[40]

In case, there is an initial registration, but after induction of a new partner, it is not registered. In such a case, if the name of the partner appears in the Register of firms, the suit would be considered as valid.[41] But a different situation can also arise, for example, a suit filed by a partner for the declaration of partnership would not be considered a suit for a right arising out of a contract.[42]

Inability of the firm to sue third person

The previous section described the consequence for a partner for not being able to sue in light of no registration of the firm or the names of the partner in the Register of Firms. Similar is the case with a firm altogether which has to file a suit against the third party. The act provides the mandatory condition that the firm has to be registered, and the person suing must have their names in the register of firms.[43]

Here the right arises out of a contract, and such a contractual right cannot be enforced by the unregistered firm against a third party.[44] A question may arise as to the object of disabling the firm in such regard. The answer lies in the legislative intent that those who deal with the firm need to be guarded so that they must be aware of whom they are dealing in the business relationship.[45]

As in the previous scenario of partner suing the firm, the change in the partnership structure after registration did not affect the suit. Similarly, the partner suing on behalf of the firm must have been inducted into the firm prior to the change in constitution of the firm.[46]

Thus various suits filed by such firms become barred by operation by operation of law. For example, such a firm cannot sue for specific performance of the contract.[47] Similarly, a suit for possession[48] or recovery of money[49] is also not maintainable, if filed by an unregistered firm. Since names of partners have to be mandatorily a part of the registration certificate, if it is not there, the defect cannot be subsequently cured by amendment of the suit.[50]

Effect on other proceedings

An unregistered firm is barred, as can be fathomed from the above, from filing actions for contractual rights. But it is very much free for filing criminal actions, for example, under section 138 of the Negotiable Instruments Act, 1881.[51] This is a position verified by various High Courts. Hence there amounts to be no consequence in criminal proceedings if the firm is left unregistered.[52]

Though some High courts took a divergent view[53], it is a mandate so given by the Supreme Court, that where a majority of High Courts have taken a certain predominant view, it is that view which must prevail.[54]

The bar of section 69 will also not apply in case of arbitral proceedings since such proceedings do not come under the purview of “other proceedings” in Section 69(3) of the act.[55] It is because of the change in the arbitration law and how the principle of severability is now in vogue, which considers an arbitration clause to be separate from the main contract.[56]

Conclusion

Hence Registration of firms becomes important so that the legal rights so provide under the law and the ones which are agreed between the parties can be validly exercised.


[1] Indian Partnership Act, 1932, § 58 (1), No. 9, Acts of Imperial Legislature, 1932 (India).

[2] Hiralal Agarwal v. State of Bihar, AIR 1972 Pat 507, p 508.

[3] Id.

[4] Bharat Chamber v. General Manager, District Industries Centre, 2012 SCC OnLine Mad 3928.

[5] Indian Partnership Act, 1932, § 59, No. 9, Acts of Imperial Legislature, 1932 (India).

[6] Hiralal Agrawal v. State of Bihar, AIR 1972 Pat 507

[7] CIT, AP, Hyderabad v. Jayalakshmi Rice & Oil Mills Contractor Co, AIR 1971 SC 1015.

[8] Girdhari Lal v. New Bharat Finance Co, AIR 1981 J&K 82.

[9] Girish Sudhakarrao Bhelonde v. State of Maharashtra, 2009 SCC OnLine Bom 1880.

[10] Id.

[11] Girdharman Kapur Chand v. Dev Raj Madan Gopal, AIR 1963 SC 1587.

[12] Mulchand Kumawat & Sons v. Rajasthan State Electricity Board, 2009 SCC OnLine Raj 1630.

[13] Sanidhya v. Dy CIT, 2018 SCC OnLine Guj 958.

[14] State of Jammu & Kashmir v. National India Construction Company, AIR 2017 J&K 66.

[15] Registration Act, 1977, § 7(1)(d), No. 35, Acts of Jammu and Kashmir State Legislature, 1977 (India).

[16] Indian Partnership Act, 1932, § 69, No. 9, Acts of Imperial Legislature, 1932 (India).

[17] Provincial Insolvency Act, 1920, No. 5, Acts of Imperial Legislature, 1920 (India); Presidency-towns Insolvency Act, 1909, No. 3, Acts of Imperial Legislature, 1909 (India).

[18] V Subramaniam v. Rajesh Raghuvandra Rao, (2009) 5 SCC 608.

[19] Id.

[20] Id.

[21] Indian Partnership Act, 1932, § 68(1), No. 9, Acts of Imperial Legislature, 1932 (India).

[22] Seth Loonkaran Sethiya v. Ivan E John, (1977) 1 SCC 379.

[23] 60ESI Corporation v. Varun Impex Ltd, 2017 SCC OnLine Ker 27187.

[24] Loonkaran Sethia v. Ivan E John, AIR 1977 SC 336.

[25] Global Aviation Services Private Limited v. Airport Authority of India, 2018 SCC OnLine Bom 233.

[26] Mohatta Bros v. BS Mills, AIR 1976 SC 1703.

[27] Multimetals Ltd v. KL Jolly, AIR 2003 Raj 8.

[28] Id.

[29] All India Road Transport Agency v. Indian Oil Corporation Ltd, 2015 SCC OnLine Gau 958.

[30] N Marappan v. VST Sengottaian, 2016 SCC OnLine Mad 6967.

[31] Navabharath Kuries & Trading Co v. CE Job, 2006 SCC OnLine Ker 501.

[32] Uttar Pradesh State Sugar Corpn Ltd v. Jain Construction Co, (2004) 7 SCC 332.

[33] Leela Shashikant Purandare v. Arvind Vishnu Govande, (2014) 3 SCC 645.

[34] Id.

[35] Indian Partnership Act, 1932, § 69 (1), No. 9, Acts of Imperial Legislature, 1932 (India).

[36] Velji Narayan Patel v. Jayanti Lal Patel, AIR 2009 Cal 164.

[37] Laljibhai Ramjibhai Hamirani v. Lavjibhai Haribhai Mandanka, 2009 SCC OnLine Guj 576.

[38] Ramanjot Singh v. State of Punjab, 2016 SCC OnLine P&H 7999.

[39] Badri Prasad v. Nagarmal, AIR 1959 SC 559.

[40] Afsar Hussain v. Trilokchand Premchand, AIR 1975 Ori 84.

[41] Sharad Vasant Kotak v. Ramniklal Chawda, (1998) 2 SCC 877; PN Shanmugam v. PD Vadivelu, 2006 SCC OnLine AP 21.

[42] Mukund Balakrishna Kulkarni v. Kulkarni Powder Metallurgical Industries, (2004) 13 SCC 750.

[43] Indian Partnership Act, 1932, § 69 (2), No. 9, Acts of Imperial Legislature, 1932 (India).

[44] Jambu Bisoiani alias Jambhubati Bisoi v. General Traders, 2019 SCC OnLine Ori 56.

[45] Ravi Bansal v. Maa Bhagwati Associates, 2014 SCC OnLine P&H 7643.

[46] Jale Khan v. Nemichand & Co, 2014 SCC OnLine Raj 5817.

[47] People Charity Fund, Chennai v. K Raghava Reddy and Associates, 2008 SCC OnLine Kar 239.

[48] Suraj Deo Parsad v. Prem Lata, 2017 SCC OnLine Del 9668.

[49] Motors v. Eicher Motors Limited, 2009 SCC OnLine HP 2055.

[50] Popular Automobiles v. GK Chami, AIR 2002 Ker 33.

[51] Mehta Credit v. Deeraj Dua, 2013 SCC OnLine P&H 8181; Kerala Arecanut Stores v. Ramkishore and Sons, AIR 1974 Ker 144; Beacon Industries v. Anupam Ghosh, ILR 2003 Kar 4325; Smt Rani Kapoor v. Silvermount, 2017 SCC OnLine Del 8985; Indrajit Gogoi v. Auto Sales and Services Station, 2008 SCC OnLine Gau 417; Joti Sarees v. Pon Muruganatham, 2006 SCC OnLine Mad 147; Asit Dutta v. State of West Bengal, 2010 SCC OnLine Cal 588; Gurcharan Singh v. State of UP, 2002 Cr LJ 3682.

[52] BS Bakshi v. State of Delhi, 2006 SCC OnLine Del 1306.

[53] Amit Desai v. Shine Enterprises, 2000 Cr LJ 2386; Sai Accumulator Industries v. Sethi Brothers, 2016 SCC OnLine Bom 2287.

[54] Synco Industries Ltd v. Assessing Officer, Income Tax, (2008) 4 SCC 22.

[55] Umesh Goel v. Himachal Pradesh Cooperative Group Housing Society Limited 209.

[56] Jagdish Chander Gupta v. Kajaria Traders (India) Limited, AIR 1964 SC 1882.


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