The Companies Act of 2013 clearly states that a crucial requirement for any entity to become a business is to register itself. A corporation must be registered before it can be established. However, the Indian Partnership Act, 1932, does not require corporations to fulfill such a responsibility. An unregistered firm retains its status as a firm and continues to exist legally. This significant advantage is not absolute and is subject to numerous constraints that we will explore in more detail.
- Non-registration
Before delving into the concept of non-registration, let’s first define registration. Registration refers to the process of incorporating a firm. Registration is the step that establishes the firm’s existence. Registration is not explicitly specified in any statute, although section 58 of the Indian Partnership Act, 1932 outlines the process of incorporation. Non-registration refers to the failure of a firm to undergo the process of incorporation or to engage in activities without obtaining registration, in contrast to registration.
- Consequences of non-registration
As per Section 4 of the Indian Partnership Act 1932, a partnership is a relationship where two or more persons agree to jointly conduct a business and distribute the earnings, liabilities, and other obligations of the firm. Registering with the Registrar of Firms is necessary to formally establish a partnership firm.
Registering a partnership firm involves officially incorporating the firm. It gives life to the business. The procedure for registering a company is outlined in Sections 58 and 59 of the Indian Partnership Act.
Unlike English law, registering a partnership firm is not mandatory to commence operations in India. However, there are certain consequences of partnership firms not being registered. Failure to register a firm indicates that the business has not completed the necessary steps for legal recognition and is no longer considered a legal entity. Section 69 of the Partnership Act specifies the limitations and penalties.
A company may under significant pressure due to the several repercussions of failing to register a partnership. A firm may face immediate or long-term ramifications in business and legal issues due to its non-registration.
- Consequences of Non-registration a Partnership Firm
Operating as an unregistered partnership entity can offer specific benefits. However, the limits of it are numerous. Its operation would differ from that of a registered company. Below are the various repercussions of failing to register a partnership firm:
- No lawsuit in a civil court can be filed against a third party or co-partner.
A partnership firm lacks the legal standing to bring a lawsuit against a third party unless it is officially registered. No partner or representative of the firm is allowed to file a complaint against that party. If a firm is not registered, a partnership firm is unable to seek assistance from legal authorities in the event of a dispute or contract violation. In order to achieve this, the company or the relevant partner must register their name with the Registrar of Firms. The case of Jagat Mittar Saigal vs Kailash Chander Saigal exemplifies the impact of not registering the firm.
- No Relief Partners available for Set-off Claim
Section 69(3) of the Indian Partnership Act outlines the rules of set-off claims and other legal actions. A set-off claim is a legal defense that allows a defendant to counter all or part of a plaintiff’s claim. The debtor has the right to offset common debts with the creditor in question. Set-off claims encompass arbitration proceedings.
An unregistered firm is unable to submit these claims. If a partnership firm is not registered and files a lawsuit to enforce an arbitration agreement, it would be deemed invalid. The Supreme Court would dismiss the lawsuit for the identical reasons. You might refer to the Jagdish Chandra Gupta vs Kajaria Traders (India) Limited case to explain the consequences of not registering a partnership firm in this situation.
- The firm can be sued by third parties.
Unregistered partnership firms might nonetheless be subject to legal action by third parties. Once more, this is an adverse consequence of not registering a company. Although the firm is prohibited from initiating complaints against third parties, the partnership requirements do not protect the firm from being sued by third parties. An external party has the legal right to file a lawsuit against a firm that is not registered. However, due to the partnership firm not being registered, it would not be deemed void.
- A partner cannot take legal action against a co-partner.
Members of an unregistered partnership are unable to lodge formal grievances or pursue legal recourse against one another. The consequences of not registering a partnership firm deprive them of certain rights. Partners in an unregistered corporation lack the ability to assert any rights.
In addition to the effects of registering or not registering partnership firms, there are also some existing exceptions. Here are the five exceptions:
- Legal action for the termination of partnerships and settlement of financial matters as per Section 69(3)(a) of the Indian Partnership Act.
- File a lawsuit to recover the assets of a bankrupt partner in the business, in accordance with the Insolvency Act of 1920.
- Any litigation with a claim amount not exceeding Rs.100.
- Lawsuit to enforce non-contractual and statutory rights, akin to the Raptakos Brett Company against Ganesh Property case.
- Sue any company that conducts business in India or in a location where the Act is not applicable.
The drawbacks of not registering a partnership much outweigh the benefits. While not mandatory by law, registering a partnership firm is crucial for operating securely and legitimately.
According to Section 4 of the Indian Partnership Act 1932, a Partnership does not have a distinct existence or personality apart from its members. A partnership is a business organization formed by two or more individuals who collaborate to conduct business together. The recent update to the act stipulates that Partnership firms must have a minimum of 2 partners and a maximum of 100 members.
To create a Partnership firm, it must be officially registered with the registrar of firms in the relevant state. Once the registrar of firms confirms that section 58 of the partnership act has been complied with, the firm is deemed to have registered. Registration of firms is not compulsory according to the Partnership Act 1932. Creating a partnership deed is advantageous.
Failure to register the firm will result in missing out on specific benefits. Trust-building is a crucial component for businesses. Unregistered individuals will not receive benefits such as legal recognition for settling disputes or using government financial initiatives.
- Consequences of Non-registration of a Partnership Firm
While registration is not mandatory for the firm, operating without incorporation is restricted by some limits.
Below are the limitations:
- No legal action can be taken to uphold rights as per the Act.
An unregistered firm lacks the legal authority to bring a lawsuit against a third party or a partner. Unregistered firms are unable to file lawsuits like registered firms. If there is a dispute or breach of contract, it cannot seek legal recourse.
- Insufficient alleviation
If the firm is not registered, a third party cannot offset claims beyond Rs100, leaving the party with little recourse. Only the officially recognized business is eligible to receive this privilege.
- Partners are prohibited from initiating legal action against one another
Unregistered firm partners who are unsatisfied cannot sue each other due to their lack of legal competence to initiate a lawsuit or enforce any claims.
- Third parties benefit from utilizing the firm
A third party can initiate legal proceedings against a partnership firm, regardless of its registration status. This is another negative outcome of a company’s inability to register. The firm cannot file third-party complaints, but the partnership restrictions do not shield the firm from third-party lawsuits. An unregistered firm is susceptible to legal action by an external party or a third-party entity. Non-registration of the partnership firm would not lead to rejection of the application as invalid.
There are a few exceptions to the effects of registering or not registering a partnership business. Here are five exceptions to the rule.
- Lawsuit for the termination of partnerships and settlement of financial matters as per Section 69(3)(a) of the Indian Partnership Act.
- As per the Insolvency Act of 1920, a lawsuit is initiated to free the assets of a partner who is unable to pay their debts in a business partnership.
- Any litigation having a claim value below Rs.100.
- A lawsuit is being used to enforce non-contractual and statutory rights, similar to the Raptakos Brett Company against Ganesh Property case.
- Suit by any corporation operating outside India or in a jurisdiction not covered by the Act.
