Consequences of Non-Registered Firms

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 require 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 Sections 58 and 59 of the Indian Partnership Act.

However, unlike English law, registration of a partnership firm to start operating is not compulsory in India. But there are certain effects of the non-registration of partnership firms. Non-registration of a firm simply means that the 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 the 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 the 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 the 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 the 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 the 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 the 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 that 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 the 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.

Section 4 of the Indian Partnership Act 1932 states that a Partnership has no independent existence or personality separate from its members. A business organization where two or more persons join together to jointly carry on some business is called a Partnership. According to the new amendment in the act,  the minimum no. of partners required in Partnership firms is 2 and a maximum of 100 members.

In order to establish a Partnership firm, it needs to be formally registered with the registrar of the firms in the respective state. When the registrar of firms is satisfied with the compliance of section 58 of the partnership act, then the firm is considered to be registered. Registration of firms is not mandatory under the law the Partnership Act 1932. However, forming a Partnership deed is beneficial. 

If the firm is not registered then it is going to miss out on certain perks. For a business, trust-building is a very important factor. Other benefits like legal recognition to settle disputes or to avail any kind of finance schemes by the government would not be given to the unregistered ones.

Effects of Non-Registration of a Partnership Firm

Although the firm is not obliged to register itself, the working of a firm without the process of incorporation is subjected to few limitations.

The limitations are listed below:

1. No suit to enforce rights under the Act

A non-registered firm does not have any freedom to file a suit against a third party or a co-partner. Unless the firm is registered it cannot file a suit like other firms. In case of any kind of dispute or breach of contract, it does not have the privilege to approach the legal authorities.

2. No proper relief. The claim above Rs100 cannot be set off by a third party if the firm is not registered, hence the party has no remedy in this regard. Only the registered business can benefit from such a privilege.

3. Partners are not allowed to bring legal cases to each other. An unregistered firm's dissatisfied partners are unable to take legal action against one another because they lack the legal capacity to file a lawsuit or the authority to enforce any rights.

4. Third parties have the advantage of using the firm. A third party can file a legal complaint against a partnership firm even if it is not registered under the law. This is another unfavorable consequence of a company's failure to register. While the firm is prohibited from submitting third-party complaints, the partnership rules do not protect the firm from third-party lawsuits. An unregistered firm can be sued by an outsider or a third-party entity. However, it would not be rejected as invalid as a result of the partnership firm's non-registration.

Aside from all of these consequences of partnership company registration and non-registration, there are a few exceptions. Here are the five exceptions to the rule:

1. Suit for dissolution of firms and accounts under the Indian Partnership Act, Section 69(3)(a).

2. According to the Insolvency Act of 1920, a suit is filed to release the property of an insolvent partner in the firm.

3. Any lawsuit with a claim amount of less than Rs.100.

4. Non-contractual and statutory rights are being enforced through a lawsuit (similar to the Raptakos Brett Company vs Ganesh Property case).

5. Suit by any such company that conducts business outside of India or in a country where the Act does not apply.