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

The Supreme Court held that to attract the bar of Section 69(2) of the Partnership Act, 1932, the contract in question must be the one entered into by partnership 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.

The bench comprising Justices Dinesh Maheshwari and Vikram Nath observed that Section 69(2) 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.

In this case, an unregistered partnership firm instituted the subject suit seeking perpetual injunction and declaration of a sale deed as null and void. An application was moved before the Trial Court by the contesting defendants 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 rejection of plaint on the ground that the suit filed by and on behalf of an unregistered partnership firm was barred by law.

The Trial Court, dismissing the said application, essentially held that, on its subject-matter relating to the validity of the sale deed in question, the bar of Section 69(2) was not operating against this suit. The High Court held that the plaintiff, being an unregistered firm, would be barred to enforce a right arising out of the contract in terms of Section 69(2) of the Act of the Partnership Act.

Before the Apex Court, the appellant- plaintiff contended that Section 69(2) of the Partnership Act does not bar all suits by an unregistered partnership firm against third parties. That, the suit is not hit by Section 69(2) because the contract is not in the regular business dealings of the firm; and the words "enforcing a right arising under the contract" used in Section 69(2) of the Act of 1932 signify the rights arising out of contracts in respect of the firm's business transactions only. The defendants-respondents contended that since the sale document was related to the business of the firm, the suit was hit by the bar under Section 69(2) of the Act of 1932.

The court, in this regard, referred to Raptakos Brett & Co. Ltd. v. Ganesh Property: (1998) 7 SCC 184, Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr: (2000) 3 SCC 250 , 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 noted the following principles laid down in Haldiram:

1. The contract by the unregistered firm referred to in Section 69(2) must not only be one entered into by the firm with the third-party defendant but must also be one entered into by the plaintiff firm in the course of the business dealings of the plaintiff firm with such third-party defendant.
2. The legislature, when it used the words "arising out of a contract" in Section 69(2), it is referring to a contract entered into in course of business transactions by the unregistered plaintiff firm with its defendant customers and the idea is to protect those in commerce who deal with such a partnership firm in business. Such third parties who deal with the partners ought to be enabled to know what the names of the partners of the firm are before they deal with them in business.
3. Section 69(2) is not attracted to any and every contract referred to in the plaint as the source of title to an asset owned by the firm.

The court then noted that the sale transaction in question is not arising out of the business of the appellant firm and that the subject suit is for enforcing a right of avoidance of a document on the ground of fraud and misrepresentation as also the statutory rights of seeking declaration and injunction.  Allowing the appeal, the court held:

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.

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