Supreme Court Allows Suit by Unregistered Firm: Shiv Developers vs. Aksharay Developers (2022)

Date of the Judgment: January 31, 2022

Citation: (2022) INSC 74

Judges: Dinesh Maheshwari, J. and Vikram Nath, J.

Can an unregistered partnership firm sue to challenge a sale deed if the transaction isn’t part of its regular business? The Supreme Court of India recently tackled this question, clarifying the scope of Section 69(2) of the Indian Partnership Act, 1932. This judgment provides crucial guidance on when an unregistered firm can seek legal recourse against third parties.

The core issue revolved around whether the bar on suits by unregistered firms applies to a transaction that is not part of the firm’s regular business dealings. The Supreme Court held that such suits are maintainable, overturning the High Court’s decision.

The judgment was authored by Justice Dinesh Maheshwari, with Justice Vikram Nath concurring.

Case Background

The case involves a dispute between Shiv Developers, an unregistered partnership firm, and Aksharay Developers, along with its partners.

On 26.11.2013, Shiv Developers, through its partners Sunilbhai Somabhai Ajmeri and Jignesh Kanubhai Desai, along with Dineshbhai Bhailal Bhai Patel and Arjunsinh Narayansinh Rajput, purchased a property. Shiv Developers held a 60% share, while Dineshbhai and Arjunsinh held 20% each.

On 22.04.2014, a new partnership named “Aksharay Developers” was formed for the project related to the property. The partners were Sunilbhai Somabhai Ajmeri, Dineshbhai Bhailal Bhai Patel, Arjunsinh Narayansinh Rajput, and Ranjitsinh Narayansinh Rajput. A Memorandum of Understanding (MOU) was signed, stipulating a payment of Rs 1,00,00,000 to Sunilbhai Ajmeri plus a share of profits.

However, on 23.02.2015, Dineshbhai and Arjunsinh formed another firm under the same name, “Aksharay Developers,” without including Sunilbhai Ajmeri and Ranjitsinh Rajput. The next day, on 24.02.2015, this new firm purchased Shiv Developers’ 60% share of the property. The cheques issued for the sale were dishonored.

Sunilbhai Ajmeri, believing the sale was to the original Aksharay Developers firm, filed a suit on behalf of Shiv Developers to declare the sale deed void due to fraud and non-payment of consideration.

Timeline:

Course of Proceedings

The Trial Court rejected the application by the defendants to dismiss the suit, holding that the bar under Section 69(2) of the Indian Partnership Act, 1932, did not apply since the sale deed was not part of the firm’s regular business. The Trial Court also noted that the sale consideration was not received, giving the firm a legal right to enforce the terms of the sale document.

The High Court reversed the Trial Court’s decision, stating that the suit was barred by Section 69(2) of the Act of 1932. The High Court held that the sale deed was a contract entered into by the unregistered firm with a third party, making the suit non-maintainable.

Legal Framework

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

“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.”

This section essentially bars unregistered firms from enforcing rights arising from contracts against third parties. The key question here is whether the sale deed in question falls under this bar. The Supreme Court has clarified that this section is meant to protect those who deal with partnership firms in business, ensuring they know the partners before entering into business transactions.

Arguments

Appellant’s (Shiv Developers) Arguments:

• The suit is not barred by Section 69(2) of the Act of 1932 because the contract (sale deed) was not part of the regular business dealings of the firm. The bar only applies to contracts made in the course of the firm’s business transactions.
• The suit is for enforcement of statutory rights and common law rights, not just contractual rights. The firm is seeking to nullify a sale deed due to fraud and misrepresentation and also due to non-payment of sale consideration, which gives right to the appellant firm to enforce the terms of the sale document under the Transfer of Property Act, 1882.
• The contract was not in connection with the business of the unregistered firm.

Respondent’s (Aksharay Developers & Ors.) Arguments:

• The sale deed was executed by the administrator-partner of the unregistered firm and not in his individual capacity. Therefore, the sale deed was related to the business of the firm.
• Any suit filed by an unregistered firm to enforce rights arising from a contract is barred by Section 69(2) of the Act of 1932.
• The suit was for enforcement of rights arising out of a contract to which the unregistered firm was a party, making it non-maintainable.

Issues Framed by the Supreme Court

The Supreme Court addressed 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, considering the nature of the transaction and the reliefs sought.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

Legal Provisions Considered:

How Authorities Were Used:

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 to reiterate that Section 69(2) does not bar the enforcement of statutory or common law rights by an unregistered firm.
• Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr [(2000) 3 SCC 250]: The Court relied on this authority to clarify that the contract in question must be one entered into by the firm in the course of its business dealings to attract the bar of Section 69(2).
• Purushottam and Anr. v. Shivraj Fine Art Litho Works and Ors. [(2007) 15 SCC 58]: The Court followed this authority to reiterate that the bar of Section 69(2) applies only to contracts entered into in the course of business dealings with a third party.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the sale transaction was not part of the regular business of the unregistered firm, Shiv Developers. The Court emphasized that Section 69(2) of the Indian Partnership Act, 1932, is intended to protect those who deal with partnership firms in business, ensuring they know the partners before entering into business transactions. The Court also considered the nature of the suit, which was not merely for enforcement of a contractual right but also for statutory and common law remedies arising from fraud and misrepresentation.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The Court rejected the argument that the sale deed was part of the firm’s regular business, emphasizing that the firm was in the business of construction, not property sales. The Court also noted that the suit was not solely for enforcing a contractual right but also for statutory and common law remedies, including fraud and misrepresentation.

The Court considered alternative interpretations of Section 69(2) but rejected those that would extend the bar to transactions outside the firm’s regular business. The Court reasoned that such an interpretation would be contrary to the purpose of the provision, which is to protect those who deal with partnership firms in business.

The decision was reached by applying the principles established in previous judgments, particularly Haldiram Bhujiawala and Purushottam, to the specific facts of the case.

The Court quoted the following from the judgment:

“the contract by the unregistered firm referred to in Section 69(2) must not only be one entered into by the firm with the third-party defendant but must also be one entered into by the plaintiff firm in the course of the business dealings of the plaintiff firm with such third-party defendant.”

“The real crux of the question is that the legislature, when it used the words “arising out of a contract” in Section 69(2), it is referring to a contract entered into in course of business transactions by the unregistered plaintiff firm with its defendant customers and the idea is to protect those in commerce who deal with such a partnership firm in business.”

“Section 69(2) is not attracted to any and every contract referred to in the plaint as the source of title to an asset owned by the firm.”

There were no dissenting opinions.

The Court’s reasoning was based on a strict interpretation of Section 69(2), focusing on the legislative intent behind the provision. The Court’s analysis was applied to the facts of the case, concluding that the sale deed was not a regular business transaction of the firm.

This judgment has implications for future cases involving unregistered partnership firms, particularly in determining the scope of Section 69(2) and its applicability to transactions outside the regular business of the firm.

No new doctrines or legal principles were introduced. The Court applied existing principles to the facts of the case.

Key Takeaways

• An unregistered partnership firm can maintain a suit against a third party if the transaction is not part of the firm’s regular business dealings.
• Section 69(2) of the Indian Partnership Act, 1932, does not bar suits for enforcement of statutory or common law rights.
• The bar under Section 69(2) is meant to protect those in commerce who deal with partnership firms in their business.
• The contract in question must be one entered into by the firm in the course of its business dealings with the third party to attract the bar of Section 69(2).

This judgment clarifies the scope of Section 69(2) and provides important guidance for unregistered partnership firms seeking legal recourse. It ensures that the bar does not extend to transactions outside the regular business of the firm.

Directions

The Supreme Court set aside the High Court’s order and restored the Trial Court’s order, directing the Trial Court to proceed with the trial of the suit 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 a suit by an unregistered partnership firm against a third party if the transaction is not part of the firm’s regular business and the suit is for enforcement of statutory or common law rights. This case reaffirms the principles laid down in Raptakos Brett & Co. Ltd., Haldiram Bhujiawala, and Purushottam. There is no change in the previous positions of law, but a clarification of the existing legal principles.

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 partnership firm, was not barred by Section 69(2) of the Indian Partnership Act, 1932, because the sale transaction was not part of the firm’s regular business and the suit was for enforcement of statutory and common law rights. This judgment clarifies the scope of Section 69(2) and provides crucial guidance for unregistered firms seeking legal recourse.