Partnerships and the Effects of Non-Registration: Section 69(2A) declared unconstitutional

In a judgment delivered last week, V. Subramanium v. R. Rao (Civil Appeal 7438/2000; MANU/SC/0417/2009), the Supreme Court declared unconstitutional a significant state amendment to the Partnership Act, 1932.

Section 69 of the Partnership Act reads:

69. Effect of non-registration.

(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm:

(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 firms.

Through a state amendment, the State of Maharashtra introduced sub-section (2A). This new sub-section read:

(2A) No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realize the property of a dissolved firm shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm:

Provided that the requirement of registration of firm under this Sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of a dissolved firm or to realize the property of a dissolved firm.

Till the introduction of sub-section (2A), a partner in a firm could file a suit for dissolution of an unregistered partnership firm, or for accounts of the dissolved firm, or to recover the properties of the dissolved firm. With the coming into force of the sub-section in 1985, a partner in an unregistered partnership firm in Maharashtra could not file even those types of suits. The question regarding the constitutionality of the sub-section was referred to the Bombay High Court, which upheld the section. An appeal was preferred against this judgment before the Supreme Court.

The Supreme Court (Markandey Katju and G.S. Singhvi JJ.) struck down the impugned sub-section (2A) as violative of Articles 14, 19(1)(g) and 300A of the Constitution.

The Court reasoned that not allowing a partner to file a suit for accounts and recovery of property essentially deprived a partner of an unregistered firm of his right to property in the firm without any compensation. Therefore, the sub-section was in violation of Article 300A of the Constitution (“No person shall be deprived of his property save by authority of law”). Following a line of precedents, it was held that “law” contemplated in Article 300A cannot include a law which is arbitrary in nature. Additionally, the stringency of the law meant that it violated Articles 14 and 19 as well. The reasoning of the Court is seen through the following paragraph from the judgment:

“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 as in our opinion 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 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 amongst the partners the relationship of partnership cannot be put an end to by approaching a court of law. 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. Might would be right. An aggrieved partner is left without any remedy whatsoever…the restrictions placed (by the impugned section) are arbitrary and of excessive nature and go beyond what is in the public interest. Hence the restrictions cannot be regarded as reasonable.”

Accordingly, Section 69(2A) introduced by the Maharashtra state amendment was declared to be unconstitutional.