Supreme Court allows suit by unregistered firm: Shiv Developers vs. Aksharay Developers (2022)

Date of the Judgment: January 31, 2022
Citation: 2022 INSC 84
Judges: Justice Dinesh Maheshwari and Justice Vikram Nath. The judgment was authored by Justice Dinesh Maheshwari.

Can an unregistered partnership firm pursue legal action against a third party for fraud related to a property sale, or is it barred by the Indian Partnership Act? The Supreme Court of India recently addressed this question in a case involving a dispute over a property sale where the selling firm was unregistered. The court clarified that not all suits by unregistered firms are barred, especially when the suit doesn’t directly enforce a contract arising from the firm’s regular business.

Case Background

The case revolves around a property dispute involving Shiv Developers, an unregistered partnership firm, and Aksharay Developers, another firm. The key events are as follows:

On 26th November 2013, Shiv Developers, along with two individuals, purchased a property. Shiv Developers held a 60% share, while the other two held 20% each. On 22nd April 2014, a new partnership, Aksharay Developers, was formed with four partners, including a partner from Shiv Developers. This partnership was specifically for the project related to the said property. A Memorandum of Understanding (MOU) was signed, stipulating that one of the partners would receive a fixed sum and a percentage of the profit.

However, on 23rd February 2015, two of the original partners formed another firm under the same name, “Aksharay Developers,” excluding the other two original partners. The next day, on 24th February 2015, this new firm purchased the 60% share of Shiv Developers in the property. The cheques issued for the sale were later dishonoured. Shiv Developers claimed that they were unaware of the new firm and believed they were selling to the original partnership.

Shiv Developers filed a suit seeking a declaration that the sale deed was null and void due to fraud and misrepresentation, and for a perpetual injunction.

Timeline:

Course of Proceedings

The Trial Court rejected the application by the defendants to dismiss the suit, stating that the bar under Section 69(2) of the Indian Partnership Act, 1932, did not apply because the suit was not for enforcing a contract related to the firm’s business, and the sale consideration was not paid. The Trial Court noted that the suit was for the enforcement of statutory rights of the plaintiff.

The High Court of Gujarat reversed the Trial Court’s decision, holding that the suit was indeed barred by Section 69(2) of the Indian Partnership Act, 1932, as it was a suit by an unregistered firm to enforce a right arising from a contract (the sale deed) against a third party.

Legal Framework

The primary legal provision at the center of this case is Section 69 of the Indian Partnership Act, 1932, which deals with the effects of non-registration of a partnership firm. Specifically, Section 69(2) states:

“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.”

This section essentially bars an unregistered partnership firm from enforcing a right arising from a contract against a third party in court. The core issue is the interpretation of “a right arising from a contract” and whether the present suit falls under this bar.

Arguments

Appellant (Shiv Developers) Arguments:

• The suit is not for enforcing a right arising from a contract related to the firm’s business, but rather for enforcing statutory and common law rights against fraud and misrepresentation.
• The sale deed was not part of the regular business dealings of the firm. The firm’s business is construction, not property sales.
• The bar under Section 69(2) of the Indian Partnership Act, 1932, applies only to contracts related to the firm’s business transactions.
• The right to seek a declaration that the sale deed is void arises from the non-payment of consideration, which is a statutory right under the Transfer of Property Act, 1882.

Respondent (Aksharay Developers) Arguments:

• The sale deed was executed by the administrator-partner of the unregistered firm, and not in his individual capacity. This implies the sale was related to the firm’s business.
• Any suit filed by an unregistered partnership firm for enforcing rights arising from a contract is barred by Section 69(2) of the Indian Partnership Act, 1932.
• The sale deed was a contract to which the unregistered firm was a party, making the suit non-maintainable.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the suit filed by the unregistered partnership firm, Shiv Developers, is barred by Section 69(2) of the Indian Partnership Act, 1932, given that the suit seeks to declare a sale deed as null and void, alleging fraud and misrepresentation, and not for enforcement of a contract related to the firm’s business?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authorities:

The Court also considered the following legal provisions:

• Section 69 of the Indian Partnership Act, 1932: The core provision regarding the effect of non-registration of a partnership firm.
• Transfer of Property Act, 1882: The Court noted that the right to receive sale consideration is a statutory right under this Act.
• Specific Relief Act, 1963: The Court noted that the suit was also for statutory rights of declaration and injunction under this Act.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Raptakos Brett & Co. Ltd. v. Ganesh Property [(1998) 7 SCC 184]: The court followed this authority, which held that Section 69(2) does not bar the enforcement of statutory or common law rights.
• Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr [(2000) 3 SCC 250]: The court relied heavily on this authority, which clarified that the contract must be related to the firm’s business dealings and that Section 69(2) does not bar the enforcement of statutory or common law rights.
• Purushottam and Anr. v. Shivraj Fine Art Litho Works and Ors. [(2007) 15 SCC 58]: The court followed this authority, which reiterated that the bar applies only to contracts entered into in the course of business with a third party.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The nature of the suit was not for enforcing a contract related to the firm’s business, but for fraud and misrepresentation.
• The sale deed was an independent transaction, not part of the firm’s regular business of construction.
• The bar under Section 69(2) of the Indian Partnership Act, 1932, applies only to contracts related to a firm’s business dealings.
• The suit was also for enforcing statutory rights under the Transfer of Property Act, 1882 and Specific Relief Act, 1963.

Fact:Law Ratio

The court’s reasoning emphasized the factual context of the transaction, alongside the legal interpretation of Section 69(2) of the Indian Partnership Act, 1932.

Logical Reasoning

Key Takeaways

• Section 69(2) of the Indian Partnership Act, 1932, does not bar all suits by unregistered firms against third parties.
• The bar applies only to suits enforcing rights arising from contracts related to the firm’s business dealings.
• Suits enforcing statutory or common law rights are not barred, even if the firm is unregistered.
• Unregistered firms can pursue legal action for fraud and misrepresentation related to transactions not part of their regular business.

Directions

The Supreme Court set aside the High Court’s order and restored the Trial Court’s order. The Trial Court was directed to proceed with the trial in accordance with the law.

Development of Law

The ratio decidendi of this case is that Section 69(2) of the Indian Partnership Act, 1932, does not bar suits by unregistered firms if the suit is not for enforcement of a right arising from a contract related to the firm’s business. This clarifies and reinforces the principles laid down in previous cases like Haldiram Bhujiawala.

The Supreme Court reiterated that Section 69(2) is intended to protect those who deal with partnership firms in business, ensuring they know the partners. It is not intended to bar suits that are not directly related to the firm’s business contracts.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s order and restoring the Trial Court’s decision. The court held that the suit filed by Shiv Developers, an unregistered firm, was not barred by Section 69(2) of the Indian Partnership Act, 1932, as the suit was not for enforcing a right arising from a contract related to the firm’s business. This judgment clarifies that the bar under Section 69(2) is not absolute and does not extend to suits for statutory or common law rights, especially those related to fraud and misrepresentation in transactions independent of the firm’s regular business.

Category

Parent Category: Indian Partnership Act, 1932

Child Category: Section 69, Indian Partnership Act, 1932

Parent Category: Civil Law

Child Category: Property Law

FAQ

Q: Can an unregistered partnership firm file a lawsuit in India?
A: Yes, an unregistered partnership firm can file a lawsuit, but it is subject to certain restrictions under Section 69 of the Indian Partnership Act, 1932. The firm cannot enforce a right arising from a contract related to its business dealings against a third party unless it is registered. However, it can pursue suits for statutory or common law rights.

Q: What does “a right arising from a contract” mean under Section 69(2)?
A: This refers to a right that directly stems from a contract entered into by the unregistered firm in the course of its business dealings with a third party. It does not include rights arising from independent transactions or statutory/common law rights.

Q: If an unregistered firm is defrauded, can it seek legal remedies?
A: Yes, an unregistered firm can seek legal remedies for fraud and misrepresentation, especially if the transaction is not part of the firm’s regular business. The bar under Section 69(2) does not apply to such cases.

Q: What type of suits are not barred by Section 69(2)?
A: Suits for enforcement of statutory rights (like those under the Transfer of Property Act, 1882) or common law rights are not barred by Section 69(2). This includes suits for fraud, misrepresentation, and seeking declarations or injunctions.