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A hidden inducement of compulsory registration of Partnership: An Analysis

Partnership comes into existence when two or more persons join together and agree to carry on a business and share the profits thereof. Partnership in India is governed by the provisions of the Indian Partnership Act of 1932[1]. The Act does not mandate compulsory registration of partnership. A partnership firm can come into existence and function without being registered and the Act says that registration of partnership firm can be done at any time.[2]However there is indirect compulsions and inducements in the same Act[3]for registration. Hence registration was made optional at the discretion of the partners. However, The Law Commission of India Report on Partnership Act[4]strongly recommended the introduction of compulsory registration in India which was almost just two decades from the enactment of Partnership Act but it has not been adopted till now.
In the light of above said aspects regarding registration of Partnership, the author likes to look into whether compulsory registration has been prescribed by the Act in a hidden way and if so how and the reasons for it. Here, a comparison is made with regards to nature of registration of Partnership in other countries like U.K and U.S.A. Further devolving into the issue, the question of whether there are drawbacks in the present Act which favours unregistered firms has been looked into.

Registration made Mandatory
The Registration of partnership is optional. Indian Partnership Act does not prescribe any monetary or time limit beyond which a firm needs to be registered. Thus even a huge firm may choose to operate without getting itself registered. The English precedent of the Partnership Act which makes registration compulsory for a firm and imposes a penalty for non-registration was not followed when the Partnership Act was made in India in 1932 as it was considered that this step would be too drastic and would introduce several difficulties.[5]It was considered that such a measure would affect the small and ephemeral undertakings and there wouldn’t be much of public benefit derived from the registration of these undertaking except acting as a bar on the working of these enterprises. But following the English precedent any firm which is unregistered will be unable to enforce its rights in several circumstances as mentioned in the section 69 of the Act. By providing certain disabilities, this section makes registration of firm compulsory. The firm would not be able to able enforce in the Court of law its dues from third parties; nor will the partners be enabled to do so by filing a suit in their own names instead of in the name of the firm. Thus it is necessary that not only the firm should be registered but the person suing must be shown as the partner in the firm.[6]Moreover the partners themselves cannot recover through the Court his dues from the firm or his fellow partners. Neither the partners nor the firm could move a proceeding in a Court when they are entitled to a set off or to enforce any other rights arising from a contract.[7]But this can be rectified at any time. There is no bar to file a fresh suit for the same cause of action after registering the firm. It thus shows the importance that the Act has posed on the need for registration.

Purpose of Registration
This provision however does not affect the rights of the third parties. Third party has the right to proceed against the firm and the partners even though they are unregistered. Nor it does affect an unregistered partnership firm getting dissolved. Even though the firm is not registered and the it is found that the partnership is not beneficial, it should not be barred from getting dissolved as it nowhere will act as an incentive for registration as such .Hence any suit by the partners of an unregistered firm for dissolution, realisation of accounts and realisation of property of a dissolved firm will not be affected by this section.[8]The main purpose for the registration of partnership is protection of the third parties from the difficulties of proving the identity of the partners of the firm with whom they entered into transactions. The registration gives protection against false denials of partnership and evasion of liability. Hence if the firm is registered, it acts as a conclusive proof of evidence of the firm and the identity of the partners.[9] Desai J[10]when stating the principles applicable to constructing section 69 has expressed his views that the true aim of legislature in creating in such a section is to protect the interest of the third parties, as a registered firm cannot lie about its existence or its partners

Unconstitutionality of the Maharashtra Amendment Act
The Maharashtra Amendment Act[11]imposed a restriction on the dissolution of the partnership if the firm is not registered. Under the Act a partner in an unregistered firm in the State of Maharashtra could not file a suit for dissolution unless the duration of the firm was only for 6 months or the capital is less than 2000. In the case ofV. Subramaniam vs Rajesh Raghuvandra Rao[12]a question arose in front of the Supreme Court about the constitutional validity of the section (2A) of the Act. The court said that this Act creates a situation where a partnership firm is allowed to come into existence and function without registration but cannot go out of existence and this would create a situation where businessman would be reluctant to enter into unregistered partnership for fear of losing their money. It was held that such a restriction is arbitrary, unreasonable and beyond public interest. During the discourse of this case, the Court is of the view that registration though not compulsory, all the mandatory nature of the registration and its respective penal provisions has been incorporated in lieu of the English

A comparative analysis of registration
In the United States of America, though the Partnership in whole is covered by the Uniform Partnership Act in most of the states, the registration of partnership is governed by the state laws. Some states require mandatory registration of partnership with the secretary of state or other mandatory state agency. Even if partnership registration is not required, all businesses which are operating in the name other than the name of the owner, in an assumed business name should be registered. The only effect of non- compliance is to subject the partners to the penalty imposed by the statue. Failure of partnership to file the certificate is that it may not sue on the contract until it has complied with the statue.[13]

Similarly so is the situation in UK where the name of business should be registered as per the Register of Business Act 1985 which replaced the earlier Register of Business Act of 1916. The effect of default to comply with the provisions of the Act is to penalise the offending firm in relation to claims against third parties and not to effect the right of one partner against another partner.[14]

In India though the registration is not compulsory but the consequences it faces are similar to the disabilities which are present in UK and U.S.A on account of failure of compulsory registration. The Law Commission considered that a legislation similar to Register of Business Act of 1916 could be enacted in India either along with Partnership or separately. But considering the fact Indian system of naming the firms is not like the English system where the name of the partners doing business but is more of sentimental in nature involving the names of relatives or minor child or a deity. Hence the Committee dispended the idea.[15]

Drawbacks of Indian Registration Act
Various problems arise for an unregistered firm. For instance, a partnership firm in order to be avail the income tax benefits should register itself under section 184 and 185 Income Tax Act, 1961 or in case of disputes and the court could not be approached due the bar of the section 69. The Applicability of Alternate Dispute Resolution in case of a suit by unregistered firm was called into question in Jagdish Chandra Gupta v Kajaria Traders (India) Ltd[16].The Court held that such a suit is not maintainable. Howeverin Firm Ashok Traders and Anr. v Gurumukh Das Saluja and Ors[17],the Supreme Court confirmed that the bar enacted by section 69 of the Act does not affect the maintainability of an application under Arbitration and Conciliation Act.[18]This was considered as a progression in the case of alternate dispute resolution though this would pave way for unregistered firms to escape the law. But it can be observed from the circumstances of the case that the court considered the appointment of receivers as an interim measure of relief and the agreement is a short term agreement and the appointment of receivers would assist the process of dissolution. Thus arbitration proceedings in certain situations like dissolution has been held to be maintainable. This decision though seem to be supporting the unregistered firm by providing a way of relief through arbitration, it emphasizes the need for registration even by firms of short term duration to be registered. Here there is a need to look into Special Committee’s intention while drafting the Act. The Committee refrained from imposing compulsory registration, for the protection of small businesses and businesses which is for a short term period. So the question of relief in case of problems in those circumstances would not be available as in the case of Firm Ashok Traders.

The Partnership Act in India though has made registration optional, has all the necessary provisions which has made partnership registration essential at one or other point of time in a firm’s existence. Thus making partnership registration mandatory in nature or making it difficult to carry on the firm’s business otherwise. Having looked into the provisions regarding to partnership in other countries, it could be concluded that though India does not have compulsory registration, the current Act has the same impact and effects as in the case of those countries. Thus making registration in Indian Partnership act though optional neither lenient nor negligent. The registration of Partnership does not make registration of Partnership in Income Tax conclusive and it has to be separately registered as per the provisions of the Income Tax Act. The relief available to unregistered firms as per alternate dispute resolutions is not beyond the scope envisioned in the legislature by the makers of the legislation. Thus it could be concluded that the present Act suffices with respect to registration and it is kept updated through progressive judicial pronouncements.

Books referred:

1.Sir Dinshah Fardunji Mulla, The Sale of Goods Act and the Indian Partnership Act, 10thedition, Lexis Nexis Butterworths Wadhwa,2012,p.251-269
2.Avatar Singh,Law of partnership, 4thedition, Eastern Book Company,2012
3.Madhusudan Saharay, Text book on Indian Partnership Act, Universal Law Publishing Company, 2010,p.172
Websites referred:
1.7thLaw commission report, 1956 available from Last visited on 10.00, 2ndApril 2017
2. Last visited on 17.00, 1stApril 2017
3. Last visited on 10.00, 2ndApril 2017
4. visited on 11.00, 2ndApril 2017
5. Last visited on 18.00, 3rdApril 2017

Cases referred:
1.V. Subramaniam vs Rajesh Raghuvandra Rao 2009(5) SCC 608
2.S.H. Patel v. Husseinbhai Mohd AIR 1937 Bom 225
3.Bank of Koothatukulam v. Thomas AIR 1955 Trav Co. 155
4.Stevois Thompulous v. John Mandilas, 1948 AC 12 (PC)
5.V. Subramaniam vs Rajesh Raghuvandra Rao 2009(5) SCC 608
6.Jagdish Chandra Gupta v Kajaria Traders (India) LtdAIR 1864 SC 1882
7.Firm Ashok Traders and Anr. v Gurumukh Das Saluja and Ors AIR 2004 SC 1433

*LLB, 2nd Year, SLS Pune

[1]Act IX of 1932
[2]Section 58
[3]Section 69
[4]The 7thReport of Law Commission of India, 1957
[5]V. Subramaniam vs Rajesh Raghuvandra Rao 2009(5) SCC 608
[6]Bank of Koothatukulam v. Thomas AIR 1955 Trav Co. 155
[7]Section 69(3)
[8]Section 69 (3) a
[9]Sir Dinshah Fardunji Mulla, The Sale of Goods Act and the Indian Partnership Act, 10th edition, Lexis Nexis Butterworths Wadhwa,2012,p.262
[10]S.H. Patel v. Husseinbhai Mohd AIR 1937 Bom 225
[11]Maharashtra Amendment Act,1984, sub-section (2-A)
[12]V. Subramaniam vs Rajesh Raghuvandra Rao 2009(5) SCC 608
[13]Saharay Madhusudan, Text book on Indian Partnership Act, Universal Law Publishing Company, 2010,p.172
[14]Stevois Thompulous v. John Mandilas, 1948 AC 12 (PC)
[15]The 7th Report of Law Commission of India, 1957, p.6
[16]AIR 1864 SC 1882
[17]AIR 2004 SC 1433
[18]Section 9 of Arbitration and Conciliation Act,1996

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