Partner of Unregistered Firm Can’t File Suit
The term “Partnership” has been defined as “a relationship between individuals who have decided to split the earnings from a business that is operated by all of them or by any one of them acting on behalf of all.”[1] A partnership firm may be registered or unregistered; the application for registration is outlined in section 58[2] of the act, and upon completion of the registration procedure, the firm is considered registered under section 59[3] of the act. Firm registration and the consequences of non-registration are specifically covered in Chapter VI of the Act.[4]
While in English law, it is compulsory to register a partnership firm and its non-registration can lead to imposition of penalty, in India, registration of a partnership firm is not compulsory and no penalty is imposed.[5] However, this does not imply that no consequences must be faced. Section
69 of the Indian Partnership Act, 1932, specifically addresses the disability leading to
non-registration of a partnership firm. Section 69 of the Act deals with the effects of non-registration[6]. Clause 1 of Section 69 states that no partner may file a lawsuit against his fellow partners or the company to pursue rights granted by the Partnership Act or arising from a contract.[7] Likewise, under Clause 2, an unregistered firm cannot file a lawsuit against a third party to pursue any rights resulting from a contract. Due to the Act’s prohibition on lawsuits, partners in an unregistered firm are unable to enforce their rights against the firm or a third party. As a result, the firm and its members are compelled to register as partners in the Register of Firms. Section 69(2) was created to make the unregistered firm or its partners liable for the enforcement of rights resulting from agreements the plaintiff firm made with the third-party defendant throughout the course of the firm’s commercial dealings.[8] Reaffirming the same, the Hon’ble Supreme Court in the recent judgement of ‘Sunkari Tirumala Rao & Ors. vs. Penki Aruna Kumari’[9], emphasised that a partnership firm’s failure to register restricts its partners from pursuing legal recourse to uphold contractual rights under Section 69 of the Indian Partnership Act, 1932.
In the matter of ‘Sunkari Tirumala Rao & Ors. vs. Penki Aruna Kumari’, a dispute arises between the partners of an unregistered partnership firm. The plaintiff being one of the partners files a lawsuit for recovery of money from the respondent. In Original Suit No. 80/12, the petitioners sought a decree and judgement for the recovery of Rs. 30,00,000 from the defendant. Citing Section 69 of the Partnership Act, the defendants contested the suit’s maintainability, arguing that a partner of an unregistered partnership firm was not permitted to file a suit for money recovery.[10] The Trial Court however, held that the suit was maintainable as the business had not commenced despite the existence of the partnership deed. The High Court of Andhra overturned this decision.[11]
The HC held that the suit was not maintainable under section 69(1) of the Partnership Act because it forbids partners of unregistered businesses from suing to protect rights granted by the Act or resulting from contracts.[12] In response to the original plaintiff’s argument that the business has not yet commenced, the judgement of the Lahore High Court in ‘Bishen Narain v. Swaroop Narain’[13] was referred to where it was held that the partnership deed must be registered at the time of bringing a lawsuit in order to maintain a claim against the other partner, the fact that the business had not yet started is immaterial.
The Supreme Court also upheld this judgement of High Court of Andhra. It looked at the Partnership Act’s Sections 69(1) and 69(2), which forbid lawsuits between unregistered business partners and lawsuits brought by unregistered firms against third parties, respectively. The Court underlined that these clauses are obligatory and that any lawsuit that falls within their purview would be barred. The Court addressed the scope and applicability of Section 69 by citing its previous rulings in ‘Seth Loonkaran Sethiya and Others v. Mr. Ivan E. John and Others’[14] and ‘Mukund Balkrishna Kulkarni v. Kulkarni Powder Metallurgical Industries and Others.’[15]
The Seth Loonkaran Sethiya case held that a partner of an unregistered firm cannot file a lawsuit to enforce rights arising from a contract under Section 69(1) of the Indian Partnership Act. In ‘Mukund Balkrishna Kulkarni’, the Court explained that two requirements must be fulfilled for Section 69(1) to be applicable: the plaintiff must file the lawsuit “as a partner in a firm,” and the litigation must uphold a contractual right. These criteria are not met by a claim to declare the existence of a partnership since it only asks for partner acknowledgement rather than the enforcement of a right. Nonetheless, even if the firm is unregistered, Section 69(3) permits lawsuits for firm dissolution and account settlement. The Court affirmed that the dissolution and accounts prayer could be maintained under this exception, even though the claim for declaration was precluded.
Referring to the above cases, the Supreme Court in the present case noted that the petitioners had sued another partner in their role as partners of an unregistered firm in an attempt to enforce a partnership agreement right. It pointed out that the partnership deed unequivocally demonstrated that the petitioners contributed the contested sum of Rs. 30,00,000 as funding to purchase partnership business shares. The petitioners also did not file the present suit for enforcing any statutory or common law right in order to dodge section 69 of the Partnership Act. Section 69(1) would be invoked in the present case as a partner of any unregistered firm is filing a suit against another partner which under this section is barred.[16]
While looking at the present judgement, the question arises, if there is no way a partner can recover his money? The Supreme Court also clarified this in the present judgement. The Supreme Court was of opinion that the original plaintiff should have gone for a suit for dissolution of the partnership firm and rendition of accounts as this is an exception under section 69(3) of the act.[17] Instead, the original plaintiff went with the defence that the partnership has not yet commenced, in such case, the plaintiff would not have gone for dissolution, applicability of section 69(1) was also invoked. Ultimately, the Supreme Court maintained the ruling of the High Court, concluding that the petitioners’ complaint could not be maintained since the partnership firm was not registered.
Going over the sections, it is stated in 69(1) and 69(2) that a partner of an unregistered firm is not permitted to sue any of his partners or even a third party. Furthermore, 69(3) enforces a right resulting from a contract by extending the previous two clauses to a claim of set-off or other process.[18] However, what happens when a partner sues the other partner and it is during the pendency of their suit that the firm gets registered, will the suit be maintainable then?
There have been conflicting judgements on this. In ‘Radha Charan Saha v. Matilal Sana’, it was held that despite the fact that the firm was not registered on the date the complaint was instituted, the suit will still be maintained and the ruling was in favour of plaintiff.[19] This ruling however, was made sub silentio, it does not fully takes into consideration section 69 of the partnership act and why it should not be applicable?[20] This very judgement was also referred in ‘Dwijendra Nath Singh And Anr. vs Govinda Chandra And Anr.’ but was considered per incuriam as it did not strictly follow the law and was rejected.[21] It was held that suit won’t be maintainable. Referring to Patna, Bombay, Allahabad and Lahore High Courts, the Calcutta High Court in this case held that they are required to implement the Legislature’s decree and the only way to do this is by dismissing the present suit. The HC further held that-
“It might seem hard and at first sight pointless to drive a party to bring a fresh suit but if the law requires that, I do not see that we should be justified in helping him to avoid that position by interpreting the law to mean something which it does not say. If later registration would have been sufficient compliance with the law, it was for the Legislature to say that the Legislature did not say that but said on the contrary that no suit shall be instituted fay or on behalf of a firm in certain matters unless the firm has been registered. It is the duty of the Courts to carry out the law as it is and to resist the temptation of interpreting it to meet the hardship supposed or real of a particular case.”[22]
In ‘Abdul Hayet Mondal v. Siddheswar Kumar’ as well, the Calcutta High Court held that if a suit is barred at the time of filing because the partnership firm was not registered under Section 69(2) of the Partnership Act, later registration of the firm does not right this flaw. The lawsuit is void from the beginning and cannot be resurrected through further registration. This result emphasises that a case that is flawed at the outset remains so, regardless of subsequent adherence to legal standards, and is consistent with other decisions, including those made by the Privy Council.[23]
In ‘Krishan Lal Ram Lal v. Abdul Ghafur Khan’ it was held-
“In the end, it was urged by the learned counsel for the appellant that the suit should have been at the most stayed to enable the plaintiff firm to get itself registered and not dismissed. But the Act does not seem to provide for a procedure of this kind. Section 69 clearly says that no suit falling within its purview shall be instituted. It is the institution of the suit that is barred.”[24]
Following the legal maxim of Stare decisis, the Calcutta High Court in ‘Dwijendra Nath Singh And Anr. vs Govinda Chandra And Anr.’[25] upheld the rule that an unregistered firm cannot file a complaint by following precedents from several High Courts (Patna, Bombay, Allahabad, etc.).[26] Unless overturned, this decision is likely to be followed by courts in the future. The Ratio Decidendi in this case is that a lawsuit brought by an unregistered firm cannot be maintained, and this defect is not fixed by registration.[27] The Supreme Court in ‘Raptakos Brett & Co. v. Ganesh Property’[28] and ‘D.D.A. v. Kochhar Construction Work and Anr.’[29] also held the same that a suit filed by an unregistered firm would be ab initio defective and subsequent registration of the firm will not cure the initial defect. Having said that, while provision 69(2) prohibits an unregistered firm from filing a suit against a third party, it does not mention anything in regards to third party filing a suit against an unregistered firm. In ‘Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr.’, it was observed that-
On the other hand, a third party who deals with a firm and knows that a new partner has been introduced can either make registration of the new partner a condition for further dealings, or content himself with the certain security of the other partners and the chance of proving by other evidence, the partnership of the new but unregistered partner. A third party who deals with a firm without knowing of the addition of a new partner counts on the credit of the old partners only and will not be prejudiced by the failure of the new partner to register.”[30]
It is clearly stated that from the standpoint of the third party, the transaction’s legal standing will remain unchanged if registration is not completed.
The Supreme Court judgement- ‘Sunkari Tirumala Rao & Ors. vs. Penki Aruna Kumari’[31] highlighted the benefit of registering a firm, partners to comply with legal requirements and guidelines as it would protect them only against any unfair loss. Although there are no penalties for non-registration under Indian law, as opposed to English law, there are still some drawbacks, as detailed in section 69 of the Partnership Act. Section 69(1) and 69(2) prevents a partner of an unregistered firm to sue its partner or any third party. However, 69(3) is an exception provided as to terminate a partnership or settle disagreements between partners, account settlement and dissolution are essential. Even if the firm is not registered, our law acknowledges the necessity of enabling partners to pursue justice in these circumstances. It is still advisable however, to register a partnership firm as it serves as a prerequisite for the enforcement of rights and the settlement of disputes within the partnership framework. The seamless functioning of partnerships within India’s legal system depends on compliance with the Act.
[1] The Indian Partnership Act, 1932 §4
[2] The Indian Partnership Act, 1932 §58
[3] The Indian Partnership Act, 1932 §59
[4] Sonam Kumari, The Registration of Firm: Optional or Obligatory, 3 IJIRL 1, 1 (2023)
[5] Kumari, supra note 1
[6] The Indian Partnership Act, 1932 §69
[7] The Indian Partnership Act, 1932 §69(1)
[8] The Indian Partnership Act, 1932 §69(2)
[9] Sunkari Tirumala Rao vs Penki Aruna Kumari, 2025 INSC 92
[10] Supra note 6
[11] Supra note 9
[12] Supra note 7
[13] Bishen Narain v. Swaroop Narain1 AIR 1938 Lahore 43
[14] Seth Loonkaran Sethiya and Others v. Mr. Ivan E. John and Others, (1977) 1 SCC 379
[15] Mukund Balkrishna Kulkarni v. Kulkarni Powder Metallurgical Industries and Another,
(2004) 13 SCC 750
[16] Supra note 7
[17] The Indian Partnership Act, 1932 §69(3)(a)
[18] The Indian Partnership Act, 1932 §69(3)
[19] Radha Charan Saha v. Matilal Sana’, 41 Cal WN 534 (A)
[20] When a rule or principle on a specific legal issue is adopted and applied by the court in
silence, without taking into account the relevant legislation or any arguments
[21] refers to a judgment that overlooks or ignores a legal principle or binding precedent,
making it weak or incorrect.
[22] Dwijendra Nath Singh And Anr. vs Govinda Chandra And Anr., AIR1953CAL497
[23] Abdul Hayet Mondal v. Siddheswar Kumar, A.F.A.D. No. 405 of 1948, D/- 28-6-1951 (Cal)
[24] Krishan Lal Ram Lal v. Abdul Ghafur Khan, AIR 1935 Lah 893
[25] Supra note 22
[26] The legal principle known as stare decisis, which translates to “to stand by things decided”
in Latin, instructs courts to follow earlier rulings, including those of higher courts or tribunals,
because they are deemed to have persuasive and binding authority when resolving cases with
Purportedly similar facts.
[27] The Latin phrase ratio decidendi means “rationale for the decision.” The phrase describes
a crucial factual finding or line of reasoning that influences the verdict in a case.
[28] Raptakos Brett & Co. Ltd. v. Ganesh Property, 1998(4) RCR (Civil) 208
[29] D.D.A. v. Kochhar Construction Work and Anr., (1998)8 SCC 559
[30] Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr., (2000)3 SCC 250
[31] Supra note 9