According to Section 4 of the Indian Partnership Act 1932, a partnership is a relation between two or more parties who mutually agree to carry on a business and share the profits, liabilities, and other responsibilities of a firm. The formal proceedings to establish a partnership firm requires registration with the Registrar of Firms.
Registration of a partnership firm means the incorporation of a firm officially. It brings the business to existence. The process of firm registration is detailed under Section 58 and 59 of the Indian Partnership Act.
However, unlike the English law, registration of a partnership firm to start operating is not compulsory in India. But there are certain effects of non-registration of partnership firms. Non-registration of a firm simply means that business skips the formalities of incorporation and ceases to exist in the eyes of the law. Section 69, under the Partnership Act, enlists these limitations and consequences.
A firm could end up facing persuasive pressure owing to the various consequences of non-registration of partnership. Due to its non-registration, a firm could come across immediate or long-term consequences in business as well as legal aspects.
Effects of Non-registration of Partnership Firm
A partnership firm operating without registering itself can have certain advantages. But the limitations of it are far greater in number. Its working would also vary from that of a registered firm. Here are the different consequences of non-registration of a partnership firm:
1. No Suit in a Civil Court Against a Third Party or Co-partner
A partnership firm does not own the right to sue a third party until and unless the firm itself is registered. Any partner or person on behalf of the firm cannot file a complaint against that party either. As a consequence of non-registration of the firm, a partnership firm cannot approach the legal authorities for help in case of any dispute or breach of contract. To do so, the firm or the concerned partner has to have its name registered with the Registrar of Firms. The case of Jagat Mittar Saigal vs Kailash Chander Saigal can be cited as an instance of this effect of non-registration of the firm.
2. No Relief Partners for Set-off Claim
Section 69(3) under the Indian Partnership Act specifies the set-off claims and other proceedings. A set-off claim is an equitable defence to the whole or a part of a plaintiff’s claim. Here, the debtor has the right to balance mutual debts with the concerned creditor. Set-off claims also include arbitration proceedings.
However, an unregistered firm cannot file these claims. As a consequence of the non-registration of partnership firms, if any suit to enforce the arbitration agreement is filed by a non-registered firm, it would be considered invalid. The Supreme Court would reject the suit on the same grounds. If you are to state the effect of non-registration of a partnership firm in this context, you can mention the Jagdish Chandra Gupta vs Kajaria Traders (India) Limited case.
3. Third Parties Can Sue the Firm
Even if a particular partnership firm is not registered under the law, a third party can file a legal case against the firm. This is, again, an undesirable effect of non-registration of a firm. While the firm itself is restricted from filing complaints against third parties, the partnership norms do not safeguard the firm from facing third-party suits. An outsider or a third-party entity can sue an unregistered company. But as an effect of non-registration of the partnership firm, it would not be rejected as invalid.
4. No Legal Action Can be Taken by a Partner against a Co-partner
Co-partners belonging to an unregistered firm cannot file official complaints or take legal action against each other. The effects of non-registration of a partnership firm prevent them from such rights. This is because partners in an unregistered company are in no position to enforce any right.
Apart from all these effects of registration and non-registration of partnership firms, there are also certain exceptions which exist. Here are those five exceptions –
Suit for dissolution of firms and accounts according to Section 69(3)(a) under the Indian Partnership Act.
Suit to release the property of an insolvent partner in the firm, as per the Insolvency Act of 1920.
Any suit in which the claim value does not exceed Rs.100.
Suit for the enforcement of non-contractual and statutory rights (similar to the Raptakos Brett Company vs Ganesh Property case).
Suit by any such firm which operates its business out of India or in any place where the Act does not imply.
The negative effects of non-registration of a partnership are thus much more than that of positive ones. Even though registration of a partnership firm is not compulsory as per the law, it is extremely important in order to operate in a secure and legitimate manner.
1. What are Two Consequences of Non-registration of Partnership Firms?
Ans. One of the consequences of firm non-registration is that it cannot file suits against any third party. Even if there is a dispute or breach of contract, the firm will be unable to sue the party as the company itself is not registered under the law. Another effect of non-registration of partnership firms is that co-partner cannot take actions against each other either.
2. Which Section of the Indian Partnership Act Details Non-registration of Firms?
Ans. Section 56 to 71 under the Indian Partnership Act (1932) deals with the registration proceedings and norms of partnership companies. Section 69 of the Act is devoted to the limitations of firm non-registration.
3. What is the Most Crucial Consequence that a Non-registered Partnership Firm Might Experience?
Ans. As one of the most important effects of non-registration of partnership firms, you can mention the restriction of set-off claims. Section 69(3) under the Partnership Act specifies this restriction.