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Consequences of Non Registration of Partnership Firms

According to section 4 of the Indian Partnership Act ,1932 , the term 'Firm' describes a collaboration of two or more partners who engage with each other to conduct activities. In simple terms, a firm refers to a gathering of partner joining forces to undertake and execute business activities.
Meaning of registration of partnership. Firm : section 56 to 71, contained in chapter VII of the Partnership Act, deals with registration of the firms. Under section 59. the definition of registration is given where, When the registrar is satisfied that the provision of the section 58 has been duly compiled with, he shall record an entry of the statement in a register called the 'Register of firms' and shall file the statement.

The partnership act however, makes registration optional .In England the registration is compulsory .Here the registration of partnership is at the sole discretion of the partner as the act does not demand registration as a mandatory process that has to be adhered to. Therefore, an unregistered firm is not an illegal association. But non registration of partnership gives rise to a number of disabilities which have a persuasive pressure for registration.

Advantages of Registration:

Registration doesn't create partnership. It is only reliable evidence of the existence of partnership. when the firm is registered ,the statement required by and made under section 58 will be conclusive evidence against each of the partners under section 68. Some other advantages of registration of form are mentioned below.
  1. Benefit to partners: Any partner of the firm can sue the other partner, ex-partner of the firm when there is a dispute arising out of the partnership deed which is a contract or any other right arising out of the partnership act for such a purpose.
  2. Benefit to the creditor: A creditor shall on demand request any partner to repay the debt of the firm. All the partners who have their names written on the deed are equally responsible to repay the debt to the third party.
  3. Benefit to the work: A registered firm can claim tax benefits under the Income Tax Act which can save a lot of money that can be utilized for the growth of the firm.
  4. Benefit to an incoming partner: The incoming partner shall enforce his dues against the existing partner if defaulted. If there is no registration of the firm, the same shall not enforce against the existing partners.

Effects of non registration of a firm:

Section 69 of the Indian Partnership Act, 1932 outlined the consequences of non registration of a firm including the following.
  1. Inability to initiate a civil court sued by the firm or its Co partners against any third party:
    If firm registration is neglected, the firm or its representative is barred from filing a lawsuit against a third party for breaching a contract entered into by the firm. The person initiating the suit on behalf of the firm must be a registered Partner.
  2. Lack of relief for partners in offsetting claims:
    Non-registered firms cannot offset claims exceeding Rupees 100 brought against them by third parties. Additionally, pursuing other legal actions to enforce a contractual right is prohibited.
  3. Prohibition on Aggrieved partners from Legal Action against the firms or other partners:
    Individuals, whether partners or their representatives, can't legally pursue actions against the firm or any partner (real or alleged) in the absence of firm registration.An exception exists if the firm is dissolved, allowing legal action for dissolution, account settlement, and realization of the individual's share in the firm asset.
  4. Third party legal action against the Firm:
    Even without firm registration, a third party retains the right to bring legal action against the firm.
The Partnership Act doesn't provide for the compulsory registration of firms. Therefore an unregistered form is not an illegal association. Partnership Act doesn't put any restriction upon an unregistered partnership making contracts either between the parties Inter se or with some third parties. A registration of a partnership firm doesn't create a partnership. It is only evidence of the existence of partnership. Non registration of partnership gives rise to a number of disabilities which are mentioned in section 69 of the Act.However there are some exceptions of this section which doesn't affect certain rights.

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