Supreme Court clarifies the scope of Section 69(2) of the Indian Partnership Act in cases involving unregistered firms: Shiv Developers vs. Aksharay Developers (31 January 2022)

Date of the Judgment: 31 January 2022
Citation: 2022 INSC 119
Judges: Dinesh Maheshwari, J. and Vikram Nath, J.
Can an unregistered partnership firm seek legal recourse against a third party for a transaction not directly related to its core business? The Supreme Court of India recently addressed this crucial question in a case involving a dispute over a property sale. The court clarified the scope of Section 69(2) of the Indian Partnership Act, 1932, emphasizing that the bar on suits by unregistered firms applies only to contracts directly related to their business dealings. This judgment, authored by Justice Dinesh Maheshwari, with Justice Vikram Nath concurring, has significant implications for partnership firms and their legal rights.

Case Background

The case revolves around a property dispute involving Shiv Developers, an unregistered partnership firm, and Aksharay Developers, another partnership firm. Shiv Developers, through its partner Sunilbhai Somabhai Ajmeri, filed a suit against Aksharay Developers and its partners, seeking a declaration that a sale deed was null and void and for a permanent injunction. The core of the dispute arose from a sale deed executed by Sunilbhai Somabhai Ajmeri on behalf of Shiv Developers, selling a 60% share of a property to Aksharay Developers. Shiv Developers claimed that this sale was fraudulent, as the cheques issued as consideration were dishonored, and the firm was under the impression that they were selling to a firm where Sunilbhai was also a partner.

The key issue was whether an unregistered partnership firm could file a suit against a third party for a transaction that was not part of its regular business dealings. The defendants argued that Section 69(2) of the Indian Partnership Act, 1932, barred such a suit. The Trial Court initially rejected the defendant’s application, but the High Court reversed this decision, leading to the appeal before the Supreme Court.

Timeline:

Course of Proceedings

The Trial Court rejected the application for rejection of the plaint, holding that the bar of Section 69(2) of the Indian Partnership Act, 1932, did not apply because the suit was not to enforce a right arising from a contract related to the business of the firm. The High Court reversed this decision, stating that the sale deed was a contract entered into by the unregistered firm with a third party, thus attracting the bar under Section 69(2). The Supreme Court, however, disagreed with the High Court’s interpretation.

Legal Framework

The core of the legal framework 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 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.”

The Supreme Court analyzed this provision in light of previous judgments, particularly those in Raptakos Brett & Co. Ltd. v. Ganesh Property [(1998) 7 SCC 184], Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr [(2000) 3 SCC 250], and Purushottam and Anr. v. Shivraj Fine Art Litho Works and Ors. [(2007) 15 SCC 58]. The court emphasized that the bar under Section 69(2) applies only to contracts entered into by the firm in the course of its business dealings with a third party. It does not extend to every contract referred to in the plaint as a source of title to an asset owned by the firm or to suits enforcing statutory or common law rights.

Arguments

Appellant’s Arguments (Shiv Developers):

• The suit is not barred by Section 69(2) of the Indian Partnership Act, 1932, because the contract in question (the sale deed) was not part of the firm’s regular business dealings.
• The words “enforcing a right arising under the contract” in Section 69(2) refer only to rights arising from contracts related to the firm’s business transactions.
• Section 69(2) does not bar suits for enforcement of statutory or common law rights, such as the right to seek a declaration that a sale deed is null and void due to fraud and non-payment of consideration.
• The sale deed was executed due to fraud and misrepresentation, and the cheques issued for consideration were dishonored. Thus, the sale deed should be declared void.
• The right to receive the sale consideration is a legal right under the Transfer of Property Act, 1882, and is not a right arising from a business contract.

Respondent’s Arguments (Aksharay Developers):

• The sale deed was executed by the administrator-partner of the unregistered firm, Shiv Developers, and was therefore related to the business of the firm.
• Any suit filed by an unregistered partnership firm for enforcement of rights arising out of a contract is barred by Section 69 of the Indian Partnership Act, 1932.
• The High Court correctly concluded that the suit was hit by the bar under Section 69(2) of the Act.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key 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.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each authority was viewed by the Court?

• Raptakos Brett & Co. Ltd. v. Ganesh Property [(1998) 7 SCC 184]*: The Court followed this precedent, stating that Section 69(2) does not bar suits enforcing statutory or common law rights.
• Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr [(2000) 3 SCC 250]*: The Court relied on this case to clarify that the contract must be entered into during the course of the firm’s business dealings for the bar of Section 69(2) to apply.
• Purushottam and Anr. v. Shivraj Fine Art Litho Works and Ors. [(2007) 15 SCC 58]*: The Court followed this case, reiterating that the bar of Section 69(2) applies only to suits for enforcement of rights arising from contracts entered into by the unregistered firm 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 the firm’s business was construction, not property trading. Additionally, the suit was not merely to enforce a contractual right but to seek remedies for fraud and misrepresentation, along with statutory rights of declaration and injunction. The Court also considered the legislative intent behind Section 69(2), which was to protect those in commerce who deal with a partnership firm in business, ensuring they know the partners’ names.

Logical Reasoning:

The Court’s reasoning was that the bar under Section 69(2) of the Indian Partnership Act, 1932, applies only when an unregistered firm tries to enforce a right arising from a contract entered into during the course of its business with a third party. In this case, the sale deed was not part of the firm’s regular business, and the suit was to seek remedies for fraud and misrepresentation as well as statutory rights. Therefore, the bar of Section 69(2) did not apply.

The Court stated:

“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.”

“Further, 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.”

“Therefore, the bar of Section 69(2) of the Act of 1932 does not apply to the present case.”

There was no minority opinion in this case.

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 entered into by the firm during its regular business dealings.
• Suits for enforcement of statutory or common law rights are not barred by Section 69(2).
• Unregistered firms can seek legal recourse for fraud and misrepresentation, even against third parties, if the transaction is not part of their regular business.

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 suits by unregistered firms against third parties if the contract in question is not part of the firm’s regular business dealings or if the suit is to enforce statutory or common law rights. This judgment reinforces the principles laid down in previous cases like Haldiram Bhujiawala and Purushottam, clarifying that the bar under Section 69(2) is not absolute and should be interpreted in light of the legislative intent behind the provision.

Conclusion

The Supreme Court’s judgment in Shiv Developers vs. Aksharay Developers clarifies the scope of Section 69(2) of the Indian Partnership Act, 1932, by stating that the bar on suits by unregistered firms is not absolute. It emphasizes that the bar applies only to contracts directly related to the firm’s business dealings. This decision ensures that unregistered firms are not unduly restricted from seeking legal recourse for transactions outside their regular business or for enforcement of statutory or common law rights.