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THE Supreme Court has quashed a rule that debarred a partner of an unregistered firm in Maharashtra from filing a suit for dissolution of such firm. The apex court also held as illegal the law prohibiting the partner to sue for accounts of the dissolved firm or realize properties of such dissolved firm, unless the duration of the firm was only six months or it’s capital was up to Rs 2,000.

“In our opinion sub-section 2A of Section 69 (of the Indian Partnership Act, 1932) inserted by the Maharashtra Amendment violates Articles 14, 19(1)(g) and 300A of the Constitution of India,” said a bench comprising Justice Markandey Katju and Justice GS Singhvi.

The court said: “A partnership firm, whether registered or unregistered, is not a distinct legal entity, and hence the property of the firm really belongs to the partners of the firm. Sub-section 2A virtually deprives a partner in an unregistered firm from recovery of his share in the property of the firm or from seeking dissolution of the firm.”

“Sub-section 2A virtually deprives a partner of a firm from his share in the property of the firm without any compensation. Also, it prohibits him from seeking dissolution of the firm although he may want it dissolved,” the court said.

The court further said the law was clearly unreasonable and arbitrary since by prohibiting suits for dissolution of an unregistered firm, for accounts and for realization of the properties of the firm, it creates a situation where businessmen will be very reluctant to enter into an unregistered partnership out of fear that they will not be able to recover the money they have invested in the firm or to get out of the firm if they wish to do so.

There is no legal requirement, unlike in England, which makes registration of a firm compulsory, rather in India it is voluntary. Both registered and unregistered are legal, though of course registration and non-registration have different legal consequences, the court noted in its judgement.

The bench set aside a Bombay high court order. It said: “The high court was of the view that the object of the Maharashtra amendment was to induce partners to register and it was intended to protect third party members of the public. We cannot see how sub-section 2A of Section 69 in any way protects the third party members of the public. It makes it virtually impossible for partners in an unregistered firm to dissolve the firm or recover their share in the property of the firm. Hence it is totally arbitrary.”

The apex court said that the primary object of registration of a firm is protection of third parties who were subjected to hardship and difficulties in the matter of proving as to who were the partners. Under the earlier law, a third party obtaining a decree was often put to expenses and delay in proving that a particular person was a partner of that firm.

The registration of a firm provides protection to the third parties against false denials of partnership and the evasion of liability. Once a firm is registered under the Act the statements recorded in the register regarding the constitution of the firm are conclusive proof of the fact contained therein as against the partner. A partner whose name appears on the register cannot deny that he is a partner except under the circumstances provided. Even then registration of a partnership firm is not made compulsory under the Act. A partnership firm can come into existence and function without being registered.

However, the Maharashtra amendment effects such stringent disabilities on a firm that are crippling in nature. It lays down that an unregistered firm cannot enforce its claims against third parties.

Similarly, a partner who is not registered is unable to enforce his claims against third parties or against his fellow partners. An exception to this disability was a suit for dissolution of a firm or a suit for accounts of a dissolved firm or a suit for recovery of property of a dissolved firm. Thus, a partnership firm can come into existence, function as long as there is no problem, and disappear from existence without being registered. This is changed by the 1984 amendment extending the bar of the proceedings to a suit for dissolution or recovery of property as well.

The apex court said the effect of the amendment is that a partnership firm is allowed to come into existence and function without registration but it cannot go out of existence (with certain exceptions). This can result into a situation where in case of disputes among partners the relationship of partnership cannot be put an end to by approaching a court. A dishonest partner, if in control of the business, or if simply stronger, can successfully deprive the other partner of his dues from the partnership. It could result in extreme hardship and injustice, the court said.

The court allowed an appeal filed by a partner of an unregistered firm seeking its dissolution. But another partner had taken the stand that in view of the prevailing law in state of Maharashtra, the legal suit was not maintainable.

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