BY SHAGUN SINGHAL, THIRD-YEAR STUDENT AT NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL
The Partnership Act, 1932 (“Act”) was enacted after repealing certain provisions of the Indian Contract Act, 1872. Under this Act, the registration of partnership firms has been given due relevance under Schedule VII. The same, however, has not been made mandatory by law. Even though registration under the Act is not compulsory, the absence of the same can lead to certain disadvantages. One of these disadvantages has been laid down in Section 69(2) (“Section”) of the Act. The Section states; “no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.” Although this Section has been heavily relied upon over the years, it suffers from some glaring ambiguities. In this blog post, the author, first, lays down the uncertainties in the Section and thereby asserts that the Courts, have, till date, not been able to solve these conundrums and second, concludes that the only way to reach an unambiguous solution is by amending the wording of the Section altogether.
Applicability of Section 69(2) of the Partnership Act on insolvency proceedings
Recently, in the case of M/s Shree Dev Chemical Corporation v. Gammon India Limited, the National Company Law Tribunal (“NCLT”) answered the question of applicability of the Section on insolvency proceedings. While rendering its decision, the NCLT stated that procedures under the Insolvency and Bankruptcy Code, 2016 (“IBC”) are, undisputedly, ‘proceedings’ under law. Hence, relying on the strict interpretation of the Section, it opined that since suits and proceedings are different in nature, the bar under this Section can only be applicable to the former i.e. suits.
In another case of M/s NN Enterprises v. Relcon Infra Projects Limited, the NCLT, while considering the same question of law, held that the absence of the term “proceedings” in the Section itself indicates the intention of the legislature. In addition to these interpretations, the tribunals have also been of the view that Corporate Insolvency Resolution Process (“CIRP”) is not a term arising out of a contract. Rather, it is a statutory right that accrues to the IBC. Therefore, as per these cases, the bar envisaged in this Section cannot, in any case, be applicable to the insolvency proceedings.
However, in contrast to the aforementioned judgements, Section 69(3), which is read in conjunction with Section 69(2), distinctly mentions the applicability of the bar to “other proceedings”. It states, “the provision of Section 69(1) and (2) will apply to a claim of set-off or ‘other proceedings’ to enforce a right arising out of a contract”. Earlier, the term “other proceedings”, as construed in this Section, was understood to be in relation to a claim of set-off. However, the Court, in the case of Jagdish Chander Gupta v. Kajaria Traders (India) Ltd adjudged otherwise. It asserted that the word “other proceedings” should receive its full meaning, which should not be limited to a claim of set off. Hence, as per this judgement, it is clear that the instant Section can be made applicable to insolvency proceedings. Therefore, presently, there are two differing opinions of the Courts for matters pertaining to this issue.
However, to add on to the already existing conundrum, the Court, in the case of Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited and Another, while considering the application of Limitation Act on IBC, held that cases filed under the latter are applications and not suits. Hence, it would only attract Article 137 of the Limitation Act, 1963. By adjudging this, it ruled out the relevancy of Article 100 of the same Act, which, distinctively, is applicable to “other proceedings”. If this decision is related to the instant issue, the bar in the section cannot, in any situation, be applicable to the insolvency proceedings. Further, in case it is not applicable, no Court has provided a justification citing the reasons for the same, thereby making its exclusion to be arbitrary in nature.
In furtherance to these complications, it might be contended that this issue, even if resolved, would only matter if the right arises out of a contract. Thus, to prove that CIRP is a right arising out of contract, it is pertinent to refer to the landmark judgement of Swiss Ribbons Pvt. Ltd. v. Union of India. The Court in this case explicitly affirmed that the creditors can ‘claim’ for CIRP when a debt is due, in the case of an operational creditor and when it is ‘due and payable’, in the case of a financial creditor. In any case, claim, as defined under the IBC, arises in cases of a breach of contract, when such breach gives rise to a right to payment. Hence, since the initiation of a claim is through a contract itself, it cannot be understood as a right accruing solely to a statute.
Interpretation of the term “persons suing”
The Section, as mentioned, has vaguely used the words ‘persons suing’, without acknowledging its applicability in certain situations. For instance, in a circumstance wherein a change in the partnership takes place, does it become imperative for the new partner(s) to submit their names to the Register of firms before initiating a suit ?
The Punjab High Court in the case of Dr. V.S. Bahal v. S.L. Kapur & Co. answered this question in the affirmative. In this case, the firm was initially run by three partners. However, one of them eventually retired and a new partner had to replace him. The name of this partner, while filing the suit, had not been submitted to the Register of Firms. Accordingly, while considering the aforementioned question of law, the Court held that since all partners names were not registered, the suit, as per Section 69(2), cannot be maintainable in law. In addition to this, the Court in the case of Firm Buta Mal-Dev Raj v. Chanan Lal & Ors, asserted that the ascertainment of the word “persons” in the impugned section is deliberate in nature. This is because, singular, in certain cases, can imply plural, but it is never the other way round. In conjunction to this, it further went on to state that the plural form, in this instance, implies that all partners should be registered while filing a suit. Therefore, relying on these cases, the Courts have affirmed that the registration of all partners (new or old), while filing a suit, is mandatory in law.
While Punjab High Court has ruled on the non-maintainability of such suits, the Patna High Court, in the case of Chaman Lal v. Firm New India Traders, has adjudged otherwise. Similar to the aforementioned case, three new partners had joined the firm, whose names were yet to be registered. Taking the same question of law into consideration, the Court held that the non-registration of their names had no effect on the maintainability of the suit. The view taken by the Punjab High Court, according to the author, is erring for several reasons. First, the Section nowhere mentions that all names of the partners have to be registered at the time of filing a suit. Hence, adjudging the same would amount to reading imaginary words into the applicable law, which thereby shall contravene the general rule of interpretation. Moreover, usage of word “persons” cannot necessarily imply all partners at the time of filing a suit. It could mean partners when the cause of action arises, or partners when the firm was formed. Hence, relying on grammar alone could result in an incorrect interpretation of the Section in toto. Second, Order XXX Rule 1 of Civil Procedure Code (“CPC”), which lays down the procedure of such suits, permits two or more of the partners to sue, as long as they represent the firm. Therefore, relying on the legislature’s wordings in this provision, the Punjab High Court’s decision, as per the author, is contrary to the law in force.
This Section, even though modelled after the English Statutes of 1916 and 1985, has used several vague terms. Due to this ambiguity, the Judges, since its enactment, have had the discretion to interpret the terms, based on their own individual understanding. It is only because of this reason that the Courts, till date, have not been able to finalise the impugned words definite reasoning. Hence, the author is of the opinion that the only way to arrive at an unambiguous position is by changing the wordings of the Section altogether. This can be implemented in two ways, first, the words “proceedings” and “applications” can be added to Section 69(2) itself. Through its addition, the Courts will be certain that the bar, as envisaged in this Section, can be made applicable to suits, proceedings as well as applications. This will further remove the irrationality behind it being made applicable only to suits, when the others, similarly, are initiated to pursue a remedy. Second, a proviso can be added, which clarifies that the non-registration of new partners will have no bearing on the maintainability of a case, as long as the original partners are registered. However, it should mention that their registration must be filed, along with the suit. The reasoning behind this is that registration in usual circumstances can take around two weeks or more, which in certain instances, can unnecessarily delay the filing of a suit. Therefore, in such situations, the non-registration of certain members should not serve as a bar for initiating a court procedure. The author thus concludes that these alterations should be made, for the long-standing conundrum to end. Otherwise, the Courts shall continue to base their interpretations on their own psyche, which ultimately shall result in unjust decisions being rendered, time and again.