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Section 69(2) Partnership Act Does Not Bar Suit Filed by an Unregistered Firm if Contract in Question was not in the Course of its Business Dealings: Supreme Court

Team SoOLEGAL 1 Feb 2022 3:15pm

Section 69(2) Partnership Act Does Not Bar Suit Filed by an Unregistered Firm if Contract in Question was not in the Course of its Business Dealings: Supreme Court

NEW DELHI: The Supreme Court ruled that in order to be barred under Section 69(2) of the Partnership Act of 1932, the contract in question must be entered into by the partnership firm with the third-party defendant as well as by the plaintiff firm in the course of its business dealings. The bench of Justices Dinesh Maheshwari and Vikram Nath held that Section 69(2) does not preclude a suit filed by an unregistered firm from enforcing a statutory or common law right.

In this case, an unregistered partnership firm filed the underlying lawsuit, seeking a perpetual injunction and declaring a sale deed null and void. The contesting defendants filed an application before the Trial Court under Order VII Rule 11(d), Order XXX Rules 1 and 2, and Section 151 of the Code of Civil Procedure, 1908, read with Section 69 of the Indian Partnership Act, 1932, for the rejection of the plaint on the grounds that the suit was barred by law because it was filed by and on behalf of an unregistered partnership firm.

In dismissing the said application, the Trial Court essentially held that, on the subject matter of the validity of the sale deed in question, the bar of Section 69(2) did not apply to this suit.

The appellant-plaintiff contended before the Apex Court that Section 69(2) of the Partnership Act does not preclude all suits brought by an unregistered partnership firm against third parties.

That the suit is not barred by Section 69(2) because the contract is not in the firm's regular business dealings; and the words "enforcing a right arising under the contract" used in Section 69(2) of the Act of 1932 refer only to rights arising out of contracts in relation to the firm's business transactions. The defendants-respondents argued that because the sale document was related to the firm's business, the suit was barred under Section 69(2) of the Act of 1932.

The court cited Raptakos Brett & Co. Ltd. v. Ganesh Property: (1998) 7 SCC 184 and Haldiram Bhujiawala and Anr. v. Anand Kumar in this regard. Purushottam and Anr. v. Shivraj Fine Art Litho Works (2007) 2 G.L.H. 406: (2007) 15 SCC 58] and noted thus:

“We may take note of the principles vividly exposited in the case of Haldiram Bhujiawala (supra) that to attract the bar of section 69(2) of the Act of 1932, the contract in question must be the one entered into by firm with the third – party defendant and must also be the one entered into by the plaintiff firm in the course of its business dealings; and that Section 69(2) of the Act of 1932 is not a bar to a suit filed by an unregistered firm, if the same is for enforcement of a statutory right or a common law right.”

The court took note of the following Haldiram principles:

1.     The contract referred to in Section 69(2) by the unregistered firm must not only be one entered into by the firm with the third-party defendant, but it must also be one entered into by the plaintiff firm in the course of the plaintiff firm's business dealings with such third-party defendant.

2.     When the legislature used the words "arising out of a contract" in Section 69(2), it was referring to a contract entered into in the course of business transactions by the unregistered plaintiff firm with its defendant customers, and the idea was to protect those in commerce who do business with such a partnership firm. Third parties who do business with the partners should be able to learn the names of the partners before doing business with them.

3.     Section 69(2) does not apply to any and all contracts referred to in the plaint as the source of title to a firm-owned asset.

The court then noted that the sale transaction in question is not related to the appellant firm's business and that the subject suit is for enforcing a right of avoidance of a document based on fraud and misrepresentation, as well as the statutory rights of seeking declaration and injunction. The court granted the appeal, ruling:

“20. To put it differently, the relevant principles, when applied to the facts of the present case, leave nothing to doubt that the transaction in question was not the one entered into by the plaintiff firm during the course of its business (i.e., of building construction); and it had been an independent transaction of sale, of the firm’s share in the suit property, to the contesting defendants. The bar of Section 69(2) is not attracted in relation to the said sale transaction. Moreover, the subject suit cannot be said to be the one for enforcement of right arising from a contract; rather the subject suit is clearly the one where the plaintiff seeks common law remedies with the allegations of fraud and misrepresentation as also of the statutory rights of injunction and declaration in terms of the provisions of the Specific Relief Act, 1963 as also the Transfer of Property Act, 1882 (while alleging want of the sale consideration). Therefore, the bar of section 69(2) of the Act of 1932 does not apply to the present case.”



Tagged: Supreme Court   Partnership Act of 1932   Justice Dinesh Maheshwari   Justice Vikram Nath  
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