Application under Section 9 of IBC, 2016 is not a suit

ROURKELA STEEL SYNDICATE  Vs.  METISTECH FABRICATORS PVT. LTD.
NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, 
NEW DELHI COMPANY APPEAL (AT)(INSOLVENCY) NO. 924 OF 2022

THE NCLAT DELHI BENCH HELD THAT

Application under Section 9 of IBC, 2016 is not a suit and hence bar under Section 69(2) of Indian Partnership Act, 1932, is not applicable to Section 9 Application before NCLT.

BRIEF FACTS

1.  This appeal has been filed against the order dated 09.06.2022 passed by the Adjudicating Authority (NCLT, Cuttack) by which order the Application filed by the Appellant under Section 9 of IBC, the Operational Creditor has been rejected on the ground that the application is barred by Section 69(2) of the Partnership Act. 

2. The Adjudicating Authority took the view that Section 69(2) of the Partnership Act bars a suit by an unregistered partnership, hence the present Application which was filed by the Appellant against the third party for enforcing a right arising out of contract is barred.

SECTION 69(2) OF THE PARTNERSHIP ACT PROVIDES AS UNDER: "SECTION 69(2) IN THE INDIAN PARTNERSHIP ACT, 1932

(2) No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm".

3. Learned Counsel for the Appellant challenging the order of the Adjudicating Authority submits that although the Adjudicating Authority accepted the submission of the Appellant, that the Application is not barred by Limitation, however, on interpretation of Section 69(2) of the Partnership act, 1932, error has been committed in treating the Application akin to a Suit. 

4. It is submitted that Section 69(2) of Partnership Act is not attracted where an Application under Section 9 IBC is filed since Section 9 Application is not a suit so as to apply Section 69(2) of the Partnership Act. 

5. Learned Counsel for the Respondent refuting the submissions, contends that there are judgments of the Hon'ble Supreme Court, which has been referred by the Adjudicating Authority holding that a suit by unregistered partnership is barred filed against the third party. Learned Counsel for the Respondent supports the impugned order. 

OBSERVATION & DECISION OF THE NCLAT

6. We have considered the submissions of the Counsel of the parties and perused the records. The IBC provides for filing of the Application under Sections 7 & 9 and it is now settled position of law that for limitation for filing Application under Sections 7,9 & 10 are Article 137 of the Limitation Act, 1963 which is attracted. 

Article 137 of the Limitation Act provides for filing ofApplication, where no period of limitation is provided. Learned Counsel for the Appellant relied on a judgment of the Hon'ble Supreme Court- (2019) 10 SCC 572 titled "Gaurav Hargovindbhai Dave Vs. Asset Reconstruction Company (India) Limited and Anr.' where Hon'ble Supreme Court had occasion to consider the provision of Limitation Act, 1963 as well as Application under Section 7 of IBC. 

In paragraph-6 of the Judgment, following have been laid down:

"6. Having heard the learned counsel for both sides, what is apparent is that Article 62 is out of the way on the ground that it would only apply to suits. The present case being ‘an application' which is filed under Section 7, would fall only within the residuary Article 137. As rightly pointed out by the learned counsel appearing on behalf of the appellant, time, therefore, begins to run on 21-7-2011, as a result of which the application filed under Section 7 would clearly be time-barred. So far as Mr Banerjee's reliance on para 11 of B.K. Educational Services (P) Ltd., suffice it to say that the Report of the Insolvency Law Committee itself stated that the intent of the Code could not have been to give a new lease of life to debts which are already time-barred."

7. An application under Section 9 of IBC cannot be said to be a suit and analogy of Hon'ble Supreme Court judgment in Hargovindbhai Dave's case, supra, is fully applicable to the application filed under Section 9 IBC also. 

8. Further, also it is well settled by the judgment of the Hon'ble Supreme Court in B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019)11 SCC 633 that provision of Section 5 Limitation Act are also fully applicable in Section 7 & 9 IBC applications. Section 5 Limitation Act is not applicable in a suit which is also a clear indication that Application under Section 7 & 9 are not a suit. 

9. The Judgments of Hon'ble Supreme Court relied by the Adjudicating Authority regarding bar of Section 69(2) is not attracted in the present case since the application under Section 9 cannot be treated as suit. 

10. We are thus of the view that the Adjudicating Authority has committed error in rejecting Section 7 Application on the ground that it is barred by 69(2) of the Partnership Act. We are thus in view that the order impugned cannot be sustained and deserves to the set aside. 

11. In result, the present appeal is allowed, and the impugned order dated 09.06.2022 is set aside. 

12.  Application under Section 9 of IBC CP(IB) No. 14/CB/2021 is revived before the Adjudicating Authority to be heard and decided in accordance with law.

CONCLUSION

Generic term for any filing of a complaint (or petition) asking for legal redress by judicial action, often called a "lawsuit." In common parlance a suit asking for a court order for action rather than a money judgment is often called a "petition," but technically it is a "suit in equity". There are two types of suits Civil & Criminal. The definition of a civil suit or civil action is a legal proceeding brought to enforce a civil right or to obtain redress for a wrong. In other words, a civil suit is a legal action between two or more parties, seeking money or other relief. Civil suits can include actions to recover damages for injuries, breach of contract, libel or slander, and many other types of disputes. The purpose of a civil suit is to provide a forum in which the parties can present their evidence and arguments to a judge or jury and have a decision made that resolves their dispute.

National Company Law Tribunal (NCLT) is a quasi-judicial body which was set up to resolve the disputes which are arising in Indian Companies. It is the successor to the Company Law Board. It is governed by the rules framed by the Central Government. NCLT is a special court where cases relating to civil court have been barred from the jurisdiction. It means that Suits of any type cannot be filed before NCLT.

CONSEQUENCES OF NOT REGISTERING A PARTNERSHIP FIRM

Although the Partnership Act, 1932, does not make the registration of partnership mandatory. The fact that it suggests the registration of partnership firm, should make one ponder about the ifs and buts of failing to do so.  The Act subtly puts a persuasive pressure to register the partnership firms.  

SECTION 69 OF THE ACT lists out few disadvantages of not registering the firm. This section is quite elaborative and explanative and delineates the downsides of not having the firm registered. 

Perhaps the intention of the statute was to make it passively compulsive to register partnership firms. 

1. CANNOT FILE A SUIT AGAINST A CO-PARTNER  OR A THIRD PARTY

A business is bound to face challenges at some point in time. Either there might be disagreements or conflicts arising between the partners or there might be issues such as a breach of the contract created by third parties. Unfortunately, a partnership firm that has skipped registration cannot avail of any legal support in this case. In such scenarios, the firm loses its right to sue a third party or a co-partner. Neither the partners nor any person can act on behalf of the firm at such an instance. In the case of Jagat Mittar Saigal vs Kailash Chander Saigal, it was held that, in order to sue, the firm or the partner in question must have their name registered with the Registrar of firms. However, the partners can resolve the dispute through arbitral proceedings, as held in Umesh Goel v. Himachal Pradesh Co-operative Housing Society Ltd in 2016. 

2. CANNOT AVAIL SET-OFF CLAIM AGAINST THIRD PARTIES

The principle of set-off claims is explained in section 69(3) of the Partnership Act, 1932. In a set-off claim, the debtor makes adjustments and can put forward reciprocal claims in the mutual debts with the creditor. However, when a partnership firm is not registered this principle cannot be put into practice. 

3. THIRD PARTIES CANNOT BE ESTOPPED FROM SUING THE UNREGISTERED PARTNERSHIP FIRM

Although an unregistered partnership firm cannot sue a third party, the converse cannot be prevented by the Act. Thus, A third party can still go ahead and file a case against the unregistered partnership firm. Merely, because the firm does not have the right to sue does not render it immune to legal suits filed by other parties.

4. PARTNERS CANNOT TAKE ACTION AGAINST ANOTHER PARTNER

In an unregistered partnership firm, a partner cannot take any legal action against a co-partner. Any breach of contract or conflicts of interest cannot be addressed by the law in the case of unregistered partnership firms. In an unregistered partnership firm, the partners cannot enforce their rights. 

5. CONVERSION TO ANOTHER ENTITY BECOMES IMPOSSIBLE

A registered partnership firm has the option of getting itself converted to any other corporate entity like that of an LLP. This privilege is not available to unregistered partnership firms.

The fact that a partnership firm is easy to incorporate and does not require to be registered is the major reason why a number of businesses opt for it. But when the partners choose to sit over it without registering, they will have to pay the price for it quite dearly. Although an unregistered partnership firm is still legal in the eyes of law and it can still carry on its course of business uninterrupted, the disadvantages it carries alongside it are quite a bit on the heavier side. A business cannot run for long in an ideal situation and is prone to face conflicts and the firm and its partners will have to respond to it with legal actions which would be inaccessible without the registration of the firm. Therefore, the partners must make a vigilant choice and have their partnership firm registered proactively.