The Supreme Court of India, in a recent ruling, reaffirmed the mandatory nature of Section 69 of the Indian Partnership Act, 1932, ruling that partners of unregistered firms cannot enforce contractual rights against one another. The bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan delivered the ruling in the case of Sunkari Tirumala Rao & Ors. v. Penki Aruna Kumari (SLP (C) No. 30442/2019).
The Court upheld the decision of the High Court of Andhra Pradesh, which dismissed a suit for recovery of money filed by partners of an unregistered partnership firm, holding that the bar under Section 69(1) of the Act squarely applied.
Case Background
The dispute originated from Original Suit No. 80 of 2012 filed by Sunkari Tirumala Rao and others (petitioners) before the District Court, Vizianagaram. The petitioners sought recovery of ₹30 lakh from Penki Aruna Kumari (respondent), which they claimed was their contribution towards a stone crusher business under a partnership agreement.
According to the agreement dated December 11, 2009, the petitioners collectively acquired a 75% share in the partnership firm, while the respondent retained the remaining 25%. However, the firm was never registered as required under the Indian Partnership Act, 1932. The respondent allegedly failed to uphold her obligations under the agreement, prompting the petitioners to file a suit.
During trial, the defendant argued that the suit was barred under Section 69(1) of the Act, as the partnership firm was unregistered. The Trial Court ruled in favor of the petitioners, deeming the suit maintainable on the premise that the partnership business had not commenced. However, the High Court overturned this decision, holding that the bar under Section 69 applied regardless of whether the business had commenced.
Important Legal Issues
The case brought forth two critical legal questions:
1. Can partners of an unregistered firm file a suit to enforce rights arising out of a partnership agreement?
2. Does the non-commencement of business dilute the statutory bar under Section 69(1)?
Section 69(1) of the Indian Partnership Act, 1932, prohibits the institution of suits by or on behalf of unregistered firms or their partners for enforcement of rights arising out of contracts. However, Section 69(3) allows suits for the dissolution of a firm or rendition of accounts, irrespective of registration.
Key Observations of the Court
The Supreme Court extensively analyzed the scope and applicability of Section 69 and made the following observations:
1. Mandatory Nature of Section 69:
The Court emphasized that Section 69 is mandatory and bars suits between partners of unregistered firms to enforce contractual rights. Quoting Seth Loonkaran Sethiya v. Ivan E. John (1977), the bench observed:
“A bare glance at the section is enough to show that it is mandatory in character. Its effect is to render a suit by a partner of an unregistered firm, in respect of a right arising out of a contract, void.”
2. Non-Commencement of Business Irrelevant:
Addressing the argument that the partnership business had not commenced, the Court rejected the contention, relying on the judgment in Bishen Narain v. Swaroop Narain (AIR 1938 Lahore 43):
“The fact that the actual business did not commence is immaterial. Once there is an agreement of partnership, unless it is registered, no suit can be maintained by the partners for enforcing any right accruing from such agreement.”
3. Exception under Section 69(3):
The Court clarified that suits for dissolution of a partnership firm or rendition of accounts are exempted from the bar under Section 69(1), as explicitly provided under Section 69(3). It noted:
“The exception under sub-section (3) permits the filing of a suit for dissolution of the firm and accounts, even if the firm is unregistered.”
4. Application to Present Case:
The Court observed that the suit for recovery of ₹30 lakh was filed solely for enforcing a contractual right arising from the partnership agreement. The partnership firm being unregistered precluded such enforcement, as it was neither a suit for dissolution nor rendition of accounts.
Decision of the Court
The Supreme Court dismissed the appeal filed by the petitioners, upholding the decision of the High Court. It concluded that the suit for recovery of money was barred under Section 69(1) of the Indian Partnership Act, 1932.
The bench stated:
“The rigours of Section 69(1) apply unless the suit pertains to the dissolution of a firm or rendition of accounts. The bar is not diluted by the fact that the business had not commenced.”
Furthermore, the Court suggested that the petitioners could have sought relief through a suit for dissolution of the firm, as such suits are exempt from the registration requirement under Section 69(3).
