This article was written by Siddhi Kudalkar, a student of NLSIU, Bangalore.

Introduction

In this paper researcher first analyzes the current registration procedure of general partnerships under section 57[1] to section 59[2] in Chapter 7 of the Act and also Limited Liability Partnership, which was introduced recently. On the day-to-day basis many partnerships are entered into but due to the optional nature of registration in Indian Partnership law, many partnerships are not registered. Report of Special Committee in Para 12-24 states the reason for the same, which is majorly due to the short time and single ventured nature of partnerships prevalent in India at the time of formation. Section 69[3], which deals with effects of non-registration of partnership firm make registration of partnership firm highly recommendatory.

The true intention behind writing this paper that according to the researcher Partnership Law which is so crucial for business transactions is still working according to around century-old legislation. After Indian independence, there are many changes in Indian scenario and sticking to the same old legislations is creating new problems, which were not foreseeable at the time of the drafting of this legislation, one of the prominent area being non-registration of firms. Here in this paper after analyzing the current scope and judicial trend researcher felt there is some ambiguity in the sections regarding the registration.

Analyzing the registration provisions in English Law and referring to the Reports of Law Commissions researcher is trying to give some suggestions for better implementation of Partnership Law in India.

1. Registration of General Partnerships:

Indian Partnership Act governs general partnerships. According to section 4 of Indian partnership act, “Partnership is defined as the relation between two or more persons who have agreed to share the profits of a business run by all or any one of them acting for all”[4] Following is the procedure of registering general partnership:

Registrars of Firm under Section 57:

Though Indian Partnership Act talks about the appointment of Registrars of Firm, who are responsible for registration of partnership there is a provision for appointment of Deputy Registrars and Assistant Registrars under section 57 of state acts of Maharashtra and Uttar Pradesh. When copy of certificate of registration is produced though it bears the seal of Office of Registrar, if it is signed by Deputy or Assistant Registrar, as per the decision of Girdharilal v New Bharat Finance Co & ors[5] cannot be considered as a valid proof of registration as Section 57 of Indian Partnership Act speaks of Registrar of Firm only, and authority of assistants is not known to the act.

The researcher thinks that this provision is creating a lot of administrative difficulties. Because though the state has on paper power to appoint assistant registrars, if their authorizing is going to be invalid then there is no use of this authority. Thus, this provision needs reconsideration.

Procedure of registration under Section 58 and 59:

Section 58 and 59 which deal with registration cannot be read separately as they provide for two essential conditions to be fulfilled for successful registration of partnership.

Section 58 is based on section 3 of the Registration of Business Names Act,1916 which talks about particulars to be supplied for the application of registration of partnership which are reduced to the least furnished information to third parties for their benefit without disclosing any confidential information about the firm.[6]

As per Section 59, Registrar is merely a recording officer making suitable entries by submitting original documents in the registrar which will contain alleged facts by the partnership.[7] Harmonious construction of these sections answers following questions:

How is partnership registered:

The first step in the registration of partnership firm is to send an application filling Form No. 1. As per the provision of section 58 it should contain following details:

1. the firm name,

2.the place or principal place of business of the firm,

3.the names of any other places where the firm carries on 4.business the date when each partner joined the firm,

5.the names in full and permanent addresses of the partners, and

6.the duration of the firm. The statement shall be signed by all the partners, or by their agents specially authorized in this behalf.[8]

Secondly following documents to be annexed to the application form:

1. Application for registration with duly filled details in Form No. 1.
2. Duly filled Specimen of Affidavit
3. Certified true copy of partnership deed. Partnership deed can be written on stamp paper and registered in Sub Registry Office like any other document.
4. Ownership proof of principal place of business or rental/lease agreement thereof.
5. As per the section 58(3), if firm uses a business name which indicates royal or government sanction or patronage like “Crown”, “Emperor”, “Empress”, “Empire”, “Imperial”, “King”, consent to the use of such words as part of the firm name by order in writing should attach.[9]

Thirdly, all partners must sign The application form or their agents specially authorized in this behalf in the presence of a witness who must be either Gazetted Officer, Advocate, Vakil, Magistrate of Registered Accountant. If a partner refuses to sign the application form, registration cannot take place unless that partner’s name is dropped.[10]

Lastly, The aforementioned application has to be sent to the Registrar at the specified address along with the fees. As per section 71 of Indian Partnership Act, states are empowered to make their own rules regarding the fee structure for registration of partnership. However, Schedule I of Indian Partnership act prescribes the maximum fees that can be levied by the states. As pre Schedule, I the registration maximum fees for a statement under section 58 are Rs 525.[11]

When is partnership registered:

As stated in section 59, a partnership is registered when a registrar is satisfied with the veracity of application filed under section 58 and an entry of statement in the register called Register of Firms is recorded.[12]

Proof of Registration:

As per Rule 9 under Indian Partnership Act, a proof of registration is a registration certificate signed by Registrar. In the case of Girdharilal v New Bharat Finance[13], it was decided by Jammu and Kashmir High Court that though the registration certificate was in Form C it was signed by the assistant registrar who is non-entity under this act and thus no proof was said to have produced.[14]

Discretion of Registrar:

Consideration of  section 58(1) given an impression that once the application is sent, entry is made under section 59 and firm registered from the date of the application itself. In the case of Jayalakshmi Rice & Oil Mills Contractors Co.[15] Andhra Pradesh High Court supported the above-stated impression. However in the case of CIT Andhra Pradesh v Jayalakshmi Rice & Oil Mills[16], Supreme court clarified that registration of firm is effected after entry of registration is recorded in the register of firms by the registrar who does not have the discretion to consider to interpret provisions of this act.

Business Name of the Firm

Challenged under section 58(3), In the case South India Textiles v. Government of A P,[17] an application was made by a firm for the name “South India Textiles”. However, the Registrar of Firms rejected this application, saying that the term “India” should be dropped from the title. Upon writing to the Andhra Pradesh government for permission to use this name, said permission was denied. On application to the Court, this decision was quashed, and the Court held that the use of the word ‘India’ and its derivatives do not necessarily convey the impression that the company enjoys the backing of the government concerned; rather such a  name is common for firms with “proprietary concerns”.[18]

An important question to be asked at this point is: “can the Registrar refuse to register a firm whose proposed name is similar to that of a firm which is already registered?”[19]

This question was raised in the case of Hiralal Agarwal v. State of Bihar.[20] Here, the Registrar found that the proposed name of a firm was similar to that of an already registered firm. He, therefore, declined registration. In an application for injunctive relief, the Court analyzed the power of Registrar in this regard and held that in the application form, the applicants arent required to furnish any details other than those mandated under Section 58. As long as all the requirements under Section 58 are fulfilled, the Registrar has no power to prevent the registration, notwithstanding the provisions of Section 20 of the Companies Act, 1956.

Only substantial compliance needed:

For a registration to be valid, substantial compliance with the provisions of Section 58(1) is enough and minor discrepancies can be ignored. For instance, in the case of Sohanlal Pachisia v Bilasray[21] the application form was sent with four partner names out of which two partners were retired. Calcutta High Court held that mistake of writing two extra names can easily be eliminated and it does not affect the validity of the registration of the partnership. Similarly in case of Girdhari Lal v S. D. Dinga Singh[22], Himachal Pradesh High Court held that not mentioning of one of the places of business in the application is not a substantial kind of mistake and can be corrected under Section 64 of Partnership Act.

2. Registration of LLP:

Limited Liability Partnership was introduced in India through Limited Liability Partnership Act, 2008. It a hybrid consisting benefits of both partnership and company and thus is favored by businessmen. Following are the steps involved in the registration of LLP in India:

Obtain Designated Identity Number:

Every partner has to apply for DIN to Ministry of Corporate Affairs as per Limited Liability Partnership Rules, 2009. For the application of DIN an application in eForm DIR-3 has to be filled with passport size photo, identity proof (Income-tax PAN card for Indian nationals and Passport for foreign nationals are mandatory), address proof (should not be more than one year older for foreign national and 2 months older for Indian , Email ID, mobile number are mandatory. The affidavit needs to be made by the applicant as per Annexure – 1 of the DIN Rules on Stamp paper which shall be notarized. Along with the supporting documents, Verification as per Form DIR-4 shall also be attached. This shall contain the Name, Father’s name, date of birth and text of declaration and physical signature of the applicant.[23]

Duly signed eForm has to be uploaded on MCA21 portal. After getting registered on MCA21, login ID will be provided where an applicant is to upload DIR-3 form which cannot be uploaded unless fees are paid. This application has to be signed by professional like CA, CS or CWA who is practicing full-time.

Register Digital Signature of Designated Partner:

Certifying authority, that is a person licensed to issue digital signature under section 24 of IT Act,2000 issue the digital signature. After clicking on the link ‘Register DSC’ on Ministry of Corporate Affairs website it can be either registered by the manager, director or professional. After entering DIN, same details in DIR-3 are to be filled. After clicking ‘select certificate’ and your DSC is registered.[24]

New User Registration

An applicant needs to fill e-Form 1 available on www.llp.gov.in to check available names. There an applicant is supposed to give 6 options of names along with their significance.[25]

Incorporate an LLP:

After e-Form 1 is accepted by the government (Registrar of Companies),  e-Form 2 is to be filled with attachments of  Incorporation Document and Subscription Statement( duly signed by Designated partners and witnessed by Professionals) and Address proof. Once again verification of documents is done by RoC and applicant will get an email stating about the approval.[26]

File LLP Agreement:

Duly drafted LLP agreement, printed on stamp paper has to be signed by designated partners and two witnesses after paying stamp duty, which varies from state to state depending upon the total contribution of LLP. After incorporation of LLP, within the period of 30 days, LLP agreement is to be filed through e-Form 3. One this form is approved by government LLP is registered.[27]

3. Non-registration of firm, Section 69:

Under Indian Partnership Act, though registration of partnership is not compulsory, it is highly recommended. There is no time limit for registration for partnership. Thus, the concept of reasonable time or any period of limitation cannot be introduced.[28] In the absence of the same following disabilities are imposed:

Mandatory Character:

While deciding the case of Loonkaran Sethia v Ivan E. John[29], Supreme Court explained that the liability imposed by Section 69 is compulsive and comprehensive in nature as it deprives a firm of major contractual rights. The however burden of proof lies on defendants to prove that plaintiff whose right to suit defendants are trying to take away by proving that firm is non-registered, is bound by deed of partnership.[30]

Can court return suit suo motu:

If court learns that firm is not registered, the suit can be dismissed even if defendants has not raised this point at any time while proceedings are going on as maintainability of sec 69 is a question of law and this can be brought up at any stage of the proceedings. This is also supported by the case of Balasore Textiles Distributors Assn. v Union of India.[31] However, researcher agrees with Madras High Court decision of  Goverdhandoss v Abdul Rahiman[32], which states that courts cannot dismiss any suit suo moto and matter has to bring before the court. Court states that,

“There is a distinct provision in the Limitation Act that the court is bound to dismiss the suit on the ground of limitation if it finds the suit to be barred whether the plea of this kind is raised or not.No such provision, however, exists in partnership act.”[33]

Effect of subsequent registration:

In CIT v Jayalaskhmi Rice and Oil Mills[34], Supreme court decided that subject to Section 14 of Limitation Act, the same suit cannot be rectified by subsequent registration but the new suit has to be filled. As the non-registered firm has so legal existence the suit filed by this firm is null and cannot be rectified as it is considered as if never existed.

Section 69 has three clauses. They are as follows:

Section 69(1) :

This sections bars suit to enforce a right arising from a contract or conferred by this Act in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

Rights arising out of contract and conferred by partnership act:

1. Restraint of trade:

Bombay High Court in the case of Krishnarao v.Shankar[35] raised interesting question if an agreement between two partners restraining outgoing partner from carrying out similar business as that of the firm in some area is maintainable or not. Justice Desai answered this questions affirmatively as a right which plaintiff seek to enforce is not right vested in or acquired by him as a partner but right acquired by a separate agreement which does regulate partnership relationship and gives rise to new rights.

2. Rights under section 10 claiming any loss caused to firm for any fraud by other partners and  13(d) stating rights of partners to claim interest on loan given by him/her to a firm are conferred and regulated by Partnership Act itself and cannot be conferred by the contract of partners.[36]

Section 69(2) :

This section bars unregistered firm or an agent of such firm or a person suing whose name is not in Register of Firms as a partner from enforcing right arising from a contract against third parties.

The scope of term ‘arising from contract clarified by the supreme court in Haldiram Bhujiawala v Anand Kumar[37]:

1. Statutory rights:

Trade Mark:

This issue is addressed by Supreme court in the case of Haldiram Bhjiyawala, where the firm name was registered with Registrar of Trade Marks which was eventually dissolved and trademark rights were kept by the plaintiff. Later new firm was registered and they started using same trade. The contention of the defendant was the suit is barred by section 69(2) as it is a right arising out of contract. Supreme court stated that right to use trademark is a statutory right and not a right arising from the contract.

Rights under Negotiable Instruments Act:

This act is an act independent of contracts and gives rise to independent rights and duties. This was implied in Kerala Arecanut Stores v Ramkisor and Sons[38] where, a plaintiff who was a partner of unregistered firm received a certain cheque which was dishonored. Rejecting defendant’s claim it was held that the suit is enforceable under the statutory right.

2. Negligent or deliberate act of the third party:

Section 69(2) is  not a license to handle the property of firm in whichever way they want. Any kind of negligent or intentional act, damaging property of the firm by the third party is independent of rising from contract and suit for that is maintainable.[39]

3.Contract on behalf of firm or by firm:

A bar imposed by section 69(2) is for suits by or on behalf of a firm. As stated in the case of Chimanlal v New India Traders Mica Merchants[40], plaintiff had taken out a lease in his personal capacity and later formed a partnership with two people which was unregistered. Court held that at the time of contract with the third party plaintiff was not a part of any partnership and thus the suit is enforceable.

Effect on criminal cases under sec 69(2):

A careful reading of section 69(2) suggests that it bars on the institution of civil suits and not the criminal complaint as nonregistration of partnership does not give justification of non-protection of the firm from crime. In Beacon Industries v Anupan Ghosh[41], Karnataka High Court held that bouncing of cheques is a criminal offense under Section 138 of Negotiable Instruments Act, 1881 and non-registration of partnership does not take away a right of the firm to file a criminal complaint. The court also held that cheque issued by a partner of the nonregistered firm for legally recoverable debt is also an offense if cheque bounces inviting criminal liability under section 138 of Negotiable Instruments Act.[42]

Section 69(3) :

The reason behind section 69 is that business community especially third parties should be aware of who is trading in what name, what is the purpose of the business, solvency status etc. However, this reason is not legitimate enough to declare unregistered partnerships void altogether.[43] This section allows for three things:

1. right of a partner to suit for dissolution
2. the right to sue for the accounts of dissolved firm
3. the right to sue for the realization of the assets of dissolved firm[44]

All the above-mentioned rights do not in any way intrude the purpose of section 69. The intent of drafting committee was to prevent partners from enforcing claims against third parties and other partners if a firm is unregistered and compel them to dissolve the firm by inserting sec 69(3) stating that after dissolution only court will entertain suits which will eventually discourage unregistered firms.[45]

Section 69(3) talks about the bar in 69(1 ) and 69(2) should extend to a claim of ‘set off’ or other proceedings. The question was raised before Supreme court in Jagdish Chandra Gupta v Kajaria Traders[46], if a claim can be raised under section 20 of Arbitration Act,1940 enforce ‘right arising from a contract’ which is barred by section 69(2). In this case, there was a clause of arbitration in partnership deed. There was some dispute among the partners and one of the partners referred to an arbitrator to which other partner did not respond claiming suit is unenforceable under section 69. Supreme court declaring unenforceability of suit observed that,

“It is impossible to think that the right to proceed to arbitration is not one of the rights which are founded on the agreement of parties. The word of section 69(3) or other proceedings to enforce a right ‘arising from a contract’ is sufficient to cover the present matter”.

But the Supreme Court in Smt. Prem Lata and others v M/s Ishar Dass Chaman Lal and Others[47] stated  that proceedings under clause (a) and (b) of subsection (3)69, could be referred to arbitration and the bar of section 69 is not applicable then. In this case after the death of one of the partners, widow of that partner applied for the rendering of the accounts of dissolved firm under section 69(3)(a) and the case was referred to arbitration as per the deed in the contract. As other partner didn’t respond, the jurisdiction of the civil court under s.20 of the Arbitration Act 1940 was invoked. Court held that,

4. Suggestions to eliminate ambiguity in term ‘a right arising from contract’

After reviewing above cases it can be said that most of the issues are because of the ambiguity of term ‘a right arising from a contract’. For instance in the case of Dina Nath v Metro Hotel[48], plaintiff and defendant entered into a partnership to run a hotel which was a part of premises of plaintiff. There was a clause in partnership deed that if defendant continued possession for three months after the date of partnership agreement he must pay a certain amount to plaintiff as a compensation. This case of mixed nature as it involved the question of tort or tenancy and also of ‘right arising out of contract’ as it was explicitly stated in the contract.

“Explanation: For the purposes of this section, the words ‘a right arising from a contract’ shall mean a right arising from a contract made in the course of business” [49]

Position of UK law:

5. Why registration is not compulsory in India:

After referring to Para 15, Special Committee repor[50]t on the drafting of Indian Partnership Act it was learned that like the UK making registration of partnerships compulsory in India in India would be too drastic considering emerging industrial nature of the economy. Most of these emerging partnerships were for small term registration and were for the single venture, thus benefits of compulsory registration were much lesser than disadvantages of clerical difficulty and registration was kept optional.[51]

Why there should be compulsory registration of partnerships in India:

The procedure of registration is given in Chapter VII(section 56 to 65) of Indian Partnership Act. Once the company’s registration has been done, the statements recorded in the register will be taken to be conclusive proof against the partners making them. Third parties would be in a position to know who the partners are, their competency, status, and solvency etc. Further, no one whose name is on said register can later be allowed to deny his involvement in the partnership and thereby evade liability.[52]

Problems associated with absolutely compulsory registration and solution offered:

There some partnerships in India which are of small duration, single venture or low capital. Making registration compulsory for them will be very inconvenient and cause administrative delays and difficulties. Thus, considering the 7th report of Law Commission, the researcher is of the opinion that partnerships completing within 6 months from the day of their commencement or having capital less than Rs. 500 may not necessarily be registered.[53] For all these partnerships provisions of Section 69 of Indian Partnership Act should be applicable and reliance should be given to English law replacing term ‘right arising out of contract’ with ”right arising out of contract in relation to business’ which will reduce the present ambiguity considerably.

Furthermore, the possibility of administrative difficulty of making registration compulsory for firms with small venture or for a short duration cannot be ignored. At this point, relying on 178^th Law Commission report, this researcher would also venture so far as to recommend a change to the existing law in that all partnership firms which have a proposed duration of 6 months or more or a capital of more than Rs. 500 be mandatorily required to register with the Registrar.[54]

While interpreting a law, it is important that one keeps in mind the intentions of the framers of the law. The intention of framers of partnership law was to make registration mandatory but due to the unfavorable economic conditions of that time they could not make it mandatory. However, with changing time law should also evolve and be enforced with all the fairness it deserves. There should be no ambiguity, no vagueness, and above all, no scope for loopholes. This researcher looks forward to that day.

[1] Sec. 57, Indian Partnership Act,1932.

[2] Sec. 59, Indian Partnership Act,1932.

[3] Sec. 69, Indian Partnership Act,1932.

[4] Sec. 4, Indian Partnership Act,1932.

[5] Girdharilal v New Bharat Finance Co & ors, AIR 1981 J K 82 (Supreme Court of India).

[6] P. C. Markanda, P C Markanda: The Law of Partnership in India – 2010,571 (3^rd edn., 2010).

[7] G. C. Bharuka, Pollock and Mulla – Mulla the Indian Partnership Act,274 ( 7^th edn., 2011).

[8] Sec. 58(1), Indian Partnership Act,1932.

[9] Sec. 58(3), Indian Partnership Act,1932.

[10] Avtar Singh, Law of Contract,578 (11^th edn. 2013).

[11] Schedule I, Indian Partnership Act, 1932.

[12] Sec. 59, Indian Partnership Act,1932.

[13] Girdharilal v New Bharat Finance Co & Ors, AIR 1981 J K 82 (Supreme Court of India).

[14] supra note 12, at 580.

[15] Jayalakshmi Rice & Oil Mills Contractors Co., AIR 1959 AP 352 (Andhra Pradesh High Court).

[16] CIT Andhra Pradesh v Jayalakshmi Rice & Oil Mills, 1971 AIR 1015 (Supreme Court of India).

[17] South India Textiles v. Government of A P, AIR 1989 AP 55 (Andhra Pradesh High Court).

[18] supra note 10, at 583.

[19] supra note 10, at 589.

[20] Hiralal Agarwal v. State of Bihar, AIR 1972 Pat 507 (Patna High Court).

[21] Sohanlal Pachisia v Bilasray, AIR 1954 Cal 179 (Calcutta High Court).

[22] Girdhari Lal vs Speeding Dinga Singh & Co., AIR 1954 HP 52 (Himachal Pradesh High Court).

[23] http://www.mca.gov.in/LLP/RegisterNewComp.html  ( April 10, 2015).

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] supra note 7, at 278.

[29] Loonkaran Sethia v Ivan E. John, 977 AIR 336 (Supreme Court of India).

[30]supra note 10, at 603.

[31] Textiles Distributors Assn. v Union of India, AIR 1963 Ori 188 (Orissa High court).

[32] Goverdhandoss v Abdul Rahiman, (1942) 2 MLJ 636 (Madras High Court).

[33] supra note 10, at 604.

[34] CIT Andhra Pradesh v Jayalakshmi Rice & Oil Mills, 1971 AIR 1015 (Supreme Court of India).

[35] Krishnarao v.Shankar, 56 BOMLR 973 (Bombay High Court).

[36]supra note 10, at 608.

[37] Haldiram Bhujiawala v Anand Kumar, AIR 2000 SC 1287 (Supreme Court of India).

[38] Kerala Arecanut Stores v Ramkisor and Sons, AIR 1975 Ker 144 (Kerala High Court).

[39] supra note 10, at 618.

[40] Chimanlal v New India Traders Mica Merchants,

[41] Beacon Industries v Anupan Ghosh, 2005 (1) ALD Cri 6 (Karnataka High Court).

[42] Sec. 138, Negotiable Instruments Act,1881.

[43] supra note 7, at 325.

[44] supra note 10, 636.

[45] supra note 10, 609.

[46] Jagdish Chandra Gupta v Kajaria Traders, 1964 AIR 1882 (Supreme Court of India).

[47] Prem Lata and others v M/s Ishar Dass Chaman Lal and Others, 1995 AIR 714 (Supreme Court of India).

[48] Dina Nath v Metro Hotel, AIR 1963 J&K 19 (Jammu and Kashmir High Court).

[49] 178^th Report of Law Commission of India, Recommendations For Enacting Various Amendments Both Civil And Criminal, (2001).

[50]t Gazette of India, 1931, Part V, p. 35.

[51]Universal Law Publications, Indian Partnership Act,1932,  4 (2011).

[52] Id., at 7.

[53] 7^th Report of Law Commission of India, Partnership Act,1932, (1957).

[54] supra, note 45.