I. Introduction
1.1 The Indian Partnership Act, 1932 (‘the Act’) provides for registration of partnership firms with the Registrar of Firms. Registration under the Act is voluntary and not compulsory as in England. However, u/s. 69 of the Act, in the case of firms which are unregistered, the partners of the firm cannot file any suit in a Court. Thus, this is a disability for all unregistered firms.
1.2 In spite of the above disability, the partner of an unregistered firm is entitled to sue for dissolution of the firm. This position was amended in the State of Maharashtra by the introduction of S.69(2A) and S.69(3)(a). Hence, partners of an unregistered firm in the State of Maharashtra, could not even sue for the dissolution of the firm or for realisation of the property of a dissolved firm.
1.3 This amendment in Maharashtra caused a great deal of hurdles for partners of unregistered firms and was challenged as being unconstitutional. The Bombay High Court upheld the validity of this amendment. Recently, the Supreme Court, in the case of V. Subramaniam v. Rajesh Raghuvendra Rao, Civil Appeal No. 7438 of 2000 decided on 20th March, 2009, had an occasion to consider the Constitutional validity of this important amendment. This article analyses this important judgment and the principles laid down therein.
II. Existing Legal Position
2.1 S.69 of the Act provides as under :
“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 suits 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) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect —
(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm; or
(b) the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act, 1909 (3 of 1909), or the Provincial Insolvency Act, 1920 (5 of 1920), to realise the property of an insolvent partner.”
2.2 The Maharashtra Amendment Act of 1984 inserted sub-section 2A in s.69 with effect from 1st January, 1985 which read as follows :
“(2-A) 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 realise 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 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.
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 realise the property of a dissolved firm.”
It also replaced the aforesaid clause (a) of subs-section 3 of S.69 of the Act and the amended S.69(3) read as follows :
“(3) The provisions of sub-sections (1), (2) and (2-A) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect —
(a) the firms constituted for a duration up to six months or with a capital up to two thousand rupees; or”
2.3 The net effect of the amendments in the State of Maharashtra were as follows :
(a) A partner in an unregistered partnership firm could not file a suit for :
(i) dissolution of the firm; or
(ii) accounts of a dissolved firm; or
(iii) realising the properties of a dissolved firm.
(b) The only exception when he could do so was where the firm was only 6 months old or its capital was up to Rs. 2,000 only.
Thus, a partnership firm could come into existence without being registered, but it could not go out of existence (dissolved) since it was not registered.
III. Principles laid down by the SC
3.1 The Bombay High Court had upheld the validity of the above provision which prevented a partner of an unregistered firm from suing for dissolution. Aggrieved by this decision, the appellant, V. Subramaniam, preferred an appeal before the Supreme Court. The Supreme Court laid down various important principles in its judgment.
3.2 Firm not a separate legal entity
The Court observed that unlike in the case of a company, a firm is not a separate legal entity and it does not have a personality distinct from its partners. The registration of a firm also does not give it the status of an artificial juridical person. The partners are the real owners of the firm’s property. The property belongs to the partners. This position is distinct from that in the case of a company.
3.3 Constitutional validity
3.3.1 The Supreme Court held that Art. 300A of the Constitution states that no person shall be deprived of his property except by authority of law. Sub-section 2A deprived a partner from his share in the property of the firm and that too without any compensation. The Court observed the various ways in which deprivation of property can take place by :
(a) Destruction of property as held in Chiranjit Lal Chowdhuri vs. UOI, AIR
1951 SC 41.
b) Confiscation of property as held in Ananda Behera vs. State of Orissa, AIR 1956 SC 17.
c) Revocation of a proprietary right granted by a ‘private proprietor’ as held in Virendra Singh vs. State of U.P., AIR 1954 SC 447.
d) Seizure of goods as held in Wazir Chand vs. State of H.P., AIR 1954SC 415 or seizure of immovable property as held in Virendra Singh vs. State of U.P., AIR 1954 SC 447.
e) By assumption of control of a business in exercise of the ‘police power’ of a State as per the decision in Virendra Singh vs. State of U.P.
f) A municipal authority, which, under statutory powers, pulls down dangerous premises as per the decision in Nathubhai Dhulaji vs. Municipal Corporation, AIR 1959 Born. 332.
g) An insolvent being divested of his property as per the decision in Vajrapuri Naidu, N. vs. New Theatres, Carnatic Talkies Ltd., 1959(2) MLJ 469.
3.3.2 The Court also held that the amendment was violative of Art.14 of the Constitution which guarantees the right to equality. Under the present law, partners of an unregistered firm were placed on an unequal footing vis-a-vis partners of a registered firm. Further, the amendment was ultra vires Art, 19(1)(g) which guaranteed all persons the right to practise any profession or trade. The State was empowered to reasonable restrictions on this right. However, a reasonable restriction meant that the limitation should not be arbitrary or unjust or excessive. A proper balance should be struck between the restriction and the fundamental right of freedom granted by Art. 19. A law is invalid if it is arbitrary and of excessive nature and goes beyond what is in public interest as held by the Supreme Court in Maneka Gandhi vs. UOI, AIR 1978 SC 597.
3.3.3 The Court observed that the amendments were crippling in nature. It would have the effect that the partnership cannot be put to an end by filing a suit for dissolution. It may happen that a dishonest partner who was in control of the business or if he is stronger than the rest, can deprive the other partners of their dues from the firm. This would be extremely unjust and unfair. The Court observed that the Section created a situation, where businessmen will be very reluctant to enter into unregistered firms since they would not be able to dissolve the firm and get back the money which they have got in the firm.
IV. Conclusion
The Court ultimately held that the amendment was ultra vires of Art. 14, 19(1)(g) and 300A of the Constitution and hence, it was struck down as being unconstitutional. Accordingly, the Act in Maharashtra should now be read as if it does not contain sub-section (2A) and the revised clause (a). Thus, a partner of an unregistered firm can now sue for dissolution or for accounts or for property of such a firm.
