Effect of Non-Registration of a Partnership Firm
INTRODUCTION
According to the Partnership Act of 1932, a partnership is a connection involving two or more people who decide to split the earnings made from operating a business. These people are known as partners and are called as a “firm” when they are all called as such. Although the Companies Act of 2013 requires registering, the Partnership Act has no such need for partnerships companies. A partnership would still be lawful in the eyes of the law even if it chooses not to register. For private firms, the act of registering a business is seen to be the establishment of the business. As previously indicated, partnership businesses do not operate similarly. When a business chooses not to establish, it is said to be non-registered. To consumers and other stakeholders, an established partnership business appears more reliable.
Comparing a partnership firm to a corporate entity or an ownership firm reveals a number of benefits. A partnership may be established more quickly since there are few prerequisites. Most of the time, a partnership document would be sufficient. On the other hand, an LLP would need things like digital signatures and the DIN (Director Identification Number). Private businesses have a more complicated judgement procedure that involves the board of trustees and involves approving motions everywhere. In a partnership business, this is not necessary. When opposed to proprietorship enterprises, raising money is considerably easier for partnership firms. Collecting the money for the firm is more difficult when there are several partners. Banks prefer partnership businesses over proprietorship firms when providing credit facilities because partnerships may raise more investment and seem more dependable. The firm’s partners collaborate with the same aim and share a shared objective. A collective sense of responsibility guarantees more confidence and increases the likelihood of operating a successful firm.
Whereas the Partnership Act of 1932 does not require partnership licensing, the suggestion that partnership firms be registered should cause one to consider the advantages and disadvantages of not doing so. The Act gently exerts convincing demand on partnership businesses to register. The Act’s Section 69 outlines a few drawbacks of failing to register the business. This section outlines the drawbacks of not registering the partnership and is fairly detailed and explanatory. Perhaps the statute’s purpose was to make registering partnership firms quietly compulsory.
CHAPTERISATION
Chapter One: Effects of non-registration of Partnership Firm
It is not required for businesses to register. There is no cost associated with not registering, and it is voluntary. English law mandates mandatory registration. But in this case, it wasn’t done so. It would have been too extreme and would have presented new challenges. However, registration is eventually required since Section 69 severely restricts the ability of an unregistered business and its members to bring a lawsuit. For instance, the business is prohibited from suing anyone over the cost of the items it provides. Section 69 has a required nature. Its result is that a partner will not be able to sustain a lawsuit about a right that was granted to him or obtained below a contract whenever he joined as a partner. Third parties are protected by licensing from fictitious claims of association and responsibility avoidance. Registration serves as a definitive documentation of the identity of any partners and the make-up of the partnership. The firm or the suing partner has the burden of demonstrating that the firm is listed as stipulated by the Act.
In order to avoid this problem, the firm should be established before a lawsuit is filed. However, if a disagreement between the members has already developed, none of them could accept the registration, and as a result, the business may continue to operate without being authorized. Hence, it is advised to incorporate the firm right when it is formed. Any firm that has not registered itself has many disadvantages. One of them, is that any unregistered firm is ineligible to file a suit or sue another firm or third party. they do not possess the ability to launch any lawsuit against other registered businesses. This does not deter other firms or third parties from filing a lawsuit against the firm which was unregistered but these firms too should be registered under Section 59 of the Indian Partnership Act.
A non-registered firm is prohibited from suing a third party in any court, and a registered firm is prohibited from suing any other party or being sued by any other party. In any Indian court having jurisdiction, no lawsuit may be brought. There is no remedy available to the plaintiff in this respect in the absence of incorporation of the partnership since claims above Rs 100 cannot be offset by a third party. Only the listed firm is entitled to use such a privilege. An dissatisfied partner in an unlisted partnership will not be able to sue the other partner since they lack the legal standing to do so or the authority to execute their rights.
Unregistered businesses are nonetheless endowed with some rights, even if they are bound to several restrictions. These rights might not be as complete as those of listed firms. These rights are not comparable to those who have registered their firm but it still is in existence. The unregistered firm is granted the following powers and authority. Even if the business is not listed, a third party may nonetheless file a lawsuit against them. Unregistered businesses offer each partner the ability to sue another in the event of a dissolution and to settle the accounts. The partner’s bankrupt property may be released by the court and the matter may be litigated.
An unlicensed firm as well as its associates are permitted to file a lawsuit in order to dissolve the business or obtain the assets of a dissolved one. Additionally, they are permitted to exercise any authority they may have to recover a defunct firm’s assets. Therefore, when the business dissolves, the plaintiff’s right to suit also vanishes. A procedure for the restitution of the loan could not be subject to the restrictions of Section 69 if there is no proof of a partnership, such as a lender taking a cut in the profits and liabilities of a firm. When the associates of a dissolved firm accepted each other’s shares as co-owners of the estate of the former partnership firm and one of them filed a lawsuit complaining of an unfair distribution of shares, it was determined that the lawsuit was brought by the individual partner and not by the partnership as a whole. Here, Section 69 did not take effect.
“Contractual” and “non-contractual” rights are not affected by the section’s impairment. Whether or whether the business is registered, a person can be held liable if they harm its property. Given that it is a legal obligation under the “Negotiable Instruments Act”, an unregistered business is now able to file a lawsuit to have a check written to it in its position as a payee, enforced. According to a legislative privilege granted by Section 180 of the Contract Act, a comparable business has been permitted to sue a carrier for the loss of goods for which the firm served as bailee. Railways have been found accountable for losses resulting from the shipment of an unregistered partnership firm.
Chapter Two: Cases relating to Section 69 of the Indian Partnership Act
H. Patel Vs Husseinbhai Mahomed[1]
In this instance, the court determined that the partner’s right to assert it is not a right he has gained as a partner, meaning that it doesn’t genuinely govern a person’s rights but, rather, establishes a new right that is not dependent on any rights that a partner may possess while they are a couple. An incredibly distinct cause of action that may also be permitted in unregistered corporations is the development of a new right.
Delhi Development Authority vs Kochhar Construction Work And Ors[2]
In this instance, the court determined that simply because a lawsuit was brought against a corporation for not being registered does not make the original fault go away. The firm may be registered today, but it wasn’t at the time the lawsuit was filed. Because it was unlicensed, the firm was brought before the court. If it turns out that the initial problem has been resolved, the entire case will be pointless and unfair to the plaintiff.
Shreeram Finance Corporation vs Yasin Khan And Others[3]
The court ruled that the present partners’ lawsuit was not sustainable in this case since they were hired after the filing of the firm and their names were not listed in the “register of incorporation”, which precludes them from being eligible to initiate a lawsuit. As stated in “section 69(2) of the Indian Partnership Act of 1932”, a third party’s name must be listed in the register of registration as a partnership before they may be sued. This is the reason the lawsuit was dismissed.
Savariraj Pillai vs M/S. R.S.S. Vastrad And Company[4]
Since the Firm had filed the lawsuit, S. 69(2) would not apply since the Firm was managed by a member whose identity was not on file with the “Registrar of Firms on the day of filing”. In a case of this sort, which is subject to the Act’s required provisions under S. 69(2), such a disparity might not be possible to save. Because S. 69(2) is an obligatory condition, it was decided there that a lawsuit affected by it cannot be maintained.
Padam Singh Jain vs Chandra Brothers And Ors[5]
The court held that an unlicensed firm may “file a petition for eviction” because doing so does not constitute the enforcement of a right granted to an unregistered firm under a contract; rather, it is the exercise of a statutory right, and as such, “section 69 of the Indian Partnership Act” will not be applicable in this case.
CONCLUSION
The benefit given to the unregistered business is nevertheless unfortunate because they lack the fundamental absolute right to operate as a firm. It has been noted that a company’s operation is more complicated than a firms. The company will not consider doing business with an unregistered corporation. In the perspective of the law, a corporation that has not through the registration process does not even exist. The Indian Partnership Act of 1932 gave unregistered firms extensive privileges despite the fact that being unregistered has several restrictions.
The main reason that many firms choose a partnership firm is because it is simple to set up and does not need to be registered. However, the partners will pay a steep price if they decide to ignore it and do nothing about it. Unregistered partnership firms are nonetheless lawful in the eyes of the law and are still able to conduct business as usual, but they come with a lot more drawbacks than positives. A business can’t operate in an ideal environment for very long since it is prone to dispute. When this happens, the business and its associates will need to take legal action to resolve the issue, which they wouldn’t be able to do without the firm’s registration. As a result, the partners must use caution in their decision-making and establish their partnership business as soon as possible.
Author:-Prathyusha Prasad, a student at Tamil Nadu National Law University, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
[1] S.H. Patel Vs Husseinbhai Mahomed, AIR 1937 Bom 225
[2] Delhi Development Authority vs Kochhar Construction Work And Ors, (1998) 8 SCC 559
[3] Shreeram Finance Corporation vs Yasin Khan And Others, (1989) AIR 1769
[4] T. Savariraj Pillai vs M/S. R.S.S. Vastrad And Company, AIR 1990 Mad 198
[5] Padam Singh Jain vs Chandra Brothers And Ors, AIR 1990 Pat 95
