This article is written by Khushi Sharma, currently pursuing B.A.LL.B.(Hons) from IIMT and School of Law, IP University. This is an exhaustive article which deals with the consequences of non-registration firms.
Table of Contents
Introduction
The Companies Act, 2013 evidently highlights that the main essential for any organization to turn into a company is to get itself registered. A company cannot come into existence until it gets registered. But no such obligation has been imposed for firms by the Indian Partnership Act, 1932. If a firm is not registered it does not cease to be called as a firm, it still exists in the eyes law. Certainly, such a big advantage is not absolute but is subjected to a lot of limitations which we will study further.
Non-registration
Before moving to understand what is meant by non-registration, let us first see what does registration means. The basic meaning of registration means the process of incorporation of any firm. Registration can be the process through which brings the firm into existence. Registration has not been properly defined in any statute but section 58 of the Indian Partnership Act, 1932 deals with the procedure of incorporation. Likewise, the meaning of non-registration is the exact opposite of registration, meaning when a firm does not go through the procedure of incorporation or start carrying on activities without getting registered.
Meaning of firm
Section 4 of the Indian Partnership Act, 1932 lays down that when two or more partners come in contact with each other to carry out activities are called a partnership, and when such partners come together collectively then it is called a firm. To understand it in a simpler way a firm means a collection of partners coming together to perform or carry out business activities. Sometimes we do get confused between a company and a firm but they have a proper sketched difference between them can be understood through the help of this table:
|
Basis |
Firm |
Company |
|
Legal separation from its members |
A firm is not legally separated from its partners; the partners and the firm work together as a single unit. |
A company has a separate from that of its members. 
|
|
Incorporation |
Registration in a firm is not a necessity, though it is restricted to some limitations. |
The registration of a company is very essential. If the company is not registered it ceases to exist in the eyes of law. |
|
Legal statute |
A firm is governed by the Indian Partnership Act, 1932. |
A company is governed by the Companies Act, 2013. |
|
Members |
A firm shall have a minimum of 2 partners and a maximum in the commerce industry to be 20 and in the banking industry to be 10. |
A company shall have a minimum of 2 members and a maximum of 50 members. |
|
Liability |
Joint liability. |
Separate liability from its members. |
Procedure for registration
Section 58 of the Indian Partnership Act.1932 deals with the procedure for incorporation of a firm in which the firm has to initially fill a form which shall contain different details about the firm which are as follows:
- Name of the firm,
- The address of the underlining members,
- The duration of the firm,
- The original place of the firm, and
- The place where the firm will carry out all its functions.
After the registration is complete the form is submitted to the registrar, who then accepts the form and registers the form by completing it through writing the details in the registration register. This process is mentioned in section 59 of the Indian Partnership Act,1932. Another important essential which needs to be taken care of during the incorporation is that the registration application must be duly signed by all the members.
Effects of Non-registration
As mentioned above that the working of a firm without the process of incorporation is an advantage but it is subjected to limitations. A non-registered firm does not have all the rights of a registered firm. Its working is different from that of a registered firm and the right of a non-registered firm is restricted. The effect on a firm for not being a registered one is mentioned under section 69 of the Indian Partnership Act,1932. There are certain consequences to it which are as follows:
No suit to enforce rights under the Act
A firm which has not undergone the process of incorporation cannot file a suit against any other firm or third party. A non-registered firm does not have the privilege to file a suit like all other registered firms. Another important essential about this sub-point is that the person or the third party suing the non-registered firm shall be already registered in the register as a firm.
No suit to enforce rights against any third party
A non-registered firm cannot file a suit against a third party in any court, neither can they file any suit against any party and nor any party can sue them if they are registered in the registrar. No suit can be filed in any court of jurisdiction within India.
No proper relief
If there is no registration of the firm, the claim exceeding Rs100 cannot be set off by a third party, So there is no relief in this regard to the party. Such a right can be only enjoyed by the registered firm.
Partners cannot bring legal action against each other
An aggrieved partner of an unregistered firm cannot bring legal action towards each other as they are in no position to file a suit in the court or have the power to enforce any right.
Powers which are given to the unregistered firms
Though being subjected to many limitations, unregistered firms are still vested with some powers which may not be as absolute as the registered ones but they do exist. Certain rights and power is given to the unregistered firm are as follows:
- Even if the firm is unregistered, a third party can still bring out a legal action towards them.
- Unregistered firms give power to the partner to file a suit against another one in cases of dissolution and for settling the accounts.
- The court can release the insolvent property of the partner and bring legal action to it.
Case laws relating to the effect
In this case, the court held that the right which the partner wants to enforce it is not an acquired right which has been acquired by him as a partner which means that it does not actually regulate the rights of a person but instead of all that it creates a new right and which is not based on the rights of what a partner may hold while being one. The creation of a new right is an extremely different cause of action which may also be allowed in unregistered firms.
In this case, the court held that just because a proceeding has been filed in the court for its non-registration, the obligation to it be registered as a company does not remove the initial defect as it may be a registered firm now but it was not one in the institution of the proceeding. It was unregistered that is why the firm was led to court if it is seen that the initial defect is settled the whole point of the proceeding will be meaningless as well as it will be unjustified to the plaintiff too.
In this case, it was held by the court that the suit filed by the current partners was not maintainable as the current partners were recruited after the registration and their name was not mentioned under the register of incorporation which makes them not in the position to file a suit. As it was mentioned under section 69(2) of the Indian Partnership Act,1932 that for a third party to sue, their name shall be mentioned in the register of registration as a firm. So that is why the suit was not held liable.
There is a clear view that the proceeding under Section 20 of the Arbitration Act will be void ab initio meaning that it does not exist from its very inception; just because it has to register itself it does not mean that there will be fair action and the suit will be maintainable, it will not cure the initial defect.
The court was of the view that an unregistered firm can file a petition for eviction as it is not an enforcement of right in an agreement that is not allowed to an unregistered firm instead it is a statutory right and therefore section 69 of the Indian Partnership Act does not apply here.
Conclusion
So as stated in the article the advantage provided to the unregistered firm is yet a misfortune as they do not have the basic absolute right to work as a firm. It is observed that the working of a company is more complex than that of a firm. The company does not entertain a company being unregistered. A company that has not gone under the process of registration does not exist in the eyes of law. Even if being unregistered has many limitations still many powers have been provided to the unregistered firm through the Indian Partnership Act, 1932.
References
- https://www.casemine.com/search/in/unregistered%20partnership%20firm
- https://www.pathlegal.in/Landmark-Judgement-Effects-of-non-registration-of-partnershi-blog-1181082
- http://www.legalserviceindia.com/articles/rn.htm
- https://www.youtube.com/watch?v=5aprrEk-RRA
- https://www.toppr.com/guides/business-laws/the-indian-partnership-act/consequences-of-non-registration-of-firm/
- www.indiankanoon.org
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