Introduction
It has been disputed for a 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 judgments. Through this article,the author has made an effort to analyze the current legal standing of such suits.
Legal Provision
As per section 69(2) of the Partnership Act, 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 Actprohibitsan 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 analyze 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 judgments 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, or revisions.
Similarly, in the landmark case of Hansraj Gupta & Others v. Dehra Dun-Mussoorie Electric Tramway Co. Ltd. (1932), the Hon’ble 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 all kinds of suits under the Indian Partnership Act of 1932, or can there be a way around it?
It is evident from the language of section 69(2) of the Partnership Act that registration is required to give the firm the 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 Hon’ble 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 the 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 section 69(2) will not apply to a passing-off action as the suit is based on tort and not on contract.
The Hon’ble Supreme Court in the recent judgment of Shiv Developers through its partner SunilbhaiSomabhaiAjmeri 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 the 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’s interpretation for the usage of the 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 judgments, 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 the 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 Corporate Insolvency Resolution Process ("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. The CIRP 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 National Company Law Tribunal ("NCLT"). However, the 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 judgments on this issue.
In one of the recent judgments, the Hon’ble NCLT 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 Hon’ble 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, of 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 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. Buildtech 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 judgment of Shree Dev Chemicals Corporation vs. Gammon India Ltd to support their interpretation.
TheHon’ble NCLT, in the case of M/s. Shree Dev Chemicals Corporation Vs. Gammon IndiaLimited [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 IndianPartnership 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 a suit. The proceeding initiated under Section 9 of the IBC does not fall under the ambit of Section 69(2) of the Partnership Act, applies to suits, and, therefore, cannot apply to proceedings under the IBC.
Further in the matter of Rourkela Steel Syndicate vs. Metistech Fabricators Private Limited [CP (IB) No.14/CB/2021], the Hon’ble 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 National Company Law Appellate tribunal ("NCLAT") for further adjudication of the case that whether an unregistered partnership firm can file the proceedings under IBC or not. Accordingly, the Hon’ble NCLAT, New Delhi bench held that IBC applications are not suits, and hence bar of section 69(2) of the Partnership Act will not be 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 Hon’ble 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 Hon’ble 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 Hon’ble 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 Hon’ble 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 the 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".
Hon’ble Supreme Court in the case of Umesh Goel v. Himachal Pradesh Cooperative Group Housing Society Limited, (2016) (11 SCC 313) and Hon’ble Madras High Court in the case of M/s. Jayamurugan Granite Exports v. M/s. SQNY Granites, (2015 4 LW 385), 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 shall have no application to arbitration proceedings as well as an arbitral award under Section 11 of the Arbitration & Conciliation Act, 1996.
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 section 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 section 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 Refrigeration and Co. and Ors. (A.P. No. 27 of 2022) the Calcutta High Court has held that dispute of an unregistered partnership firm can be referred to Arbitration, the bar under section 69 of the Partnership Act is 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 a 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 of the expression "suit or other proceeding". Hence, section 69 will not impose a bar on arbitral proceedings.
Article has been contributed by CS Lokesh Dhyani and CS Sonam Malik
Disclaimer: The views expressed in this document are based on our understanding of the legal position prevailing as on the date of issue of this article. The contents of this document are solely for information. While every care has been taken in the preparation of this article to ensure its accuracy at the time of publication, Aekom Legal assumes no responsibility for any errors which despite all precautions, may be found therein or any liability for any loss or damage of any kind arising out of any information in this article nor for any actions taken consequent to placing reliance thereon. The material contained in this document does not constitute/substitute professional advice that may be required before acting on any matter.
CAclubindia
