The Supreme Court has quashed the law which debarred a partner of an unregistered firm in Maharashtra from filing a suit for dissolution of such a firm.
The apex court also held as illegal the law prohibiting the partner to sue for accounts of the dissolved firm or realise properties of such dissolved firm, unless the duration of the firm was only six months or its capital was up to Rs 2,000.
"In our opinion sub-section 2A of section 69 (of the Indian Partnership Act, 1932) inserted by the Maharashtra Amendment violates Articles 14, 19(1)(g) and 300A of the Constitution of India," said a bench comprising Justice Markandey Katju and Justice GS Singhvi. The court said, "a partnership firm, whether registered or unregistered, is not a distinct legal entity, and hence the property of the firm really belongs to the partners of the firm. Sub-section 2A virtually deprives a partner in an unregistered firm from recovery of his share in the property of the firm or from seeking dissolution of the firm."
"Sub-section 2A virtually deprives a partner of a firm from his share in the property of the firm without any compensation. Also, it prohibits him from seeking dissolution of the firm although he may want it dissolved," court said.
The court further said that the law was clearly unreasonable and arbitrary since by prohibiting suits for dissolution of an unregistered firm, for accounts and for realisation of the properties of the firm, it creates a situation where businessmen will be very reluctant to enter into an unregistered partnership out of fear that they will not be able to recover the money they have invested in the firm or to get out of the firm if they wish to do so. There is no legal requirement, unlike in England, which makes registration of a firm compulsory, rather in India it is voluntary. Both registered and unregistered are legal though of course registration and non registration have different legal consequences, court noted in its judgment.
The bench set aside Bombay High Court order. It said, "The high court was of the view that the object of the Maharashtra Amendment was to induce partners to register and it was intended to protect third party members of the public. We cannot see how sub-section 2A of section 69 in any way protects the third party members of the public. It makes it virtually impossible for partners in an unregistered firm to dissolve the firm or recover their share in the property of the firm. Hence it is totally arbitrary."
The apex court said that 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.
Source:-Economic Times (24-Mar-09)
For any query:- legalpoint@aol.in
The apex court also held as illegal the law prohibiting the partner to sue for accounts of the dissolved firm or realise properties of such dissolved firm, unless the duration of the firm was only six months or its capital was up to Rs 2,000.
"In our opinion sub-section 2A of section 69 (of the Indian Partnership Act, 1932) inserted by the Maharashtra Amendment violates Articles 14, 19(1)(g) and 300A of the Constitution of India," said a bench comprising Justice Markandey Katju and Justice GS Singhvi. The court said, "a partnership firm, whether registered or unregistered, is not a distinct legal entity, and hence the property of the firm really belongs to the partners of the firm. Sub-section 2A virtually deprives a partner in an unregistered firm from recovery of his share in the property of the firm or from seeking dissolution of the firm."
"Sub-section 2A virtually deprives a partner of a firm from his share in the property of the firm without any compensation. Also, it prohibits him from seeking dissolution of the firm although he may want it dissolved," court said.
The court further said that the law was clearly unreasonable and arbitrary since by prohibiting suits for dissolution of an unregistered firm, for accounts and for realisation of the properties of the firm, it creates a situation where businessmen will be very reluctant to enter into an unregistered partnership out of fear that they will not be able to recover the money they have invested in the firm or to get out of the firm if they wish to do so. There is no legal requirement, unlike in England, which makes registration of a firm compulsory, rather in India it is voluntary. Both registered and unregistered are legal though of course registration and non registration have different legal consequences, court noted in its judgment.
The bench set aside Bombay High Court order. It said, "The high court was of the view that the object of the Maharashtra Amendment was to induce partners to register and it was intended to protect third party members of the public. We cannot see how sub-section 2A of section 69 in any way protects the third party members of the public. It makes it virtually impossible for partners in an unregistered firm to dissolve the firm or recover their share in the property of the firm. Hence it is totally arbitrary."
The apex court said that 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.
Source:-Economic Times (24-Mar-09)
For any query:- legalpoint@aol.in
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