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V. SUBRAMANIAM Vs. RAJESH RAGHUVANDRA RAO

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                                                    REPORTABLE

                 IN THE SUPREME COURT OF INDIA

                  CIVIL APPELLATE JURISDICTION

                  CIVIL APPEAL NO.7438 OF 2000

 


V. Subramaniam                                ..    Appellant (s)

      -versus-

Rajesh Raghuvandra Rao                              ..   Respondent
(s)

 


                         JUDGMENT


MARKANDEY KATJU, J.

 

1.    This appeal by special leave has been filed against the impugned

judgment of the Bombay High Court dated 27.9.2000 in Civil Reference

No. 19 of 1999.
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2.    Heard learned counsel for the parties and perused the record.

 

3.    This appeal arises out of a suit filed before the Bombay City Civil

Court instituted by the appellant praying inter alia for dissolution of an

unregistered partnership firm between the appellant and the respondent. In

that suit a defence taken was that the suit was not maintainable in view of

sub-section (2A) of Section 69 of the Indian Partnership Act, 1932

(hereinafter referred to as `the Act'). The Bombay City Civil Court was of

the view that the said sub-section 2A, which was introduced by the

Maharashtra Amendment to Section 69 of the Act, being the Maharashtra

Act no.29 of 1984 (which received assent of the President of India) was

unconstitutional being violative of Articles 14 and 19 (1)(g) of the

Constitution of India. Hence the Bombay City Civil Court by order dated

16.8.1999 made a reference to the High Court under Section 113 of C.P.C.

 

4.    The High Court, however, in the impugned judgment has held that the

said sub-section 2A of Section 69 of the Act is not unconstitutional. Hence

this appeal before us.

 

5.    Section 69(1) & (2) of the Partnership Act originally read as follows :
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           "69. Effect of non-registration.

                  (1) No suit to enforce a right arising from a
           contract or conferred by this Act shall be instituted in
           any court by or on behalf of any person suing as a
           partner in a firm against the firm or any person alleged to
           be or to have been a partner in the firm unless the firm is
           registered and the person suing is or has been shown in
           the Register of Firms as a partner in the firm:

                  (2) 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 firms."

 

6.   Sub-section 2A which was introduced by the Maharashtra

Amendment 1984 states as follows :


                  "(2A) No suit to enforce any right for the
           dissolution of a firm or for accounts of a dissolved firm
           or any right or power to realize the property of a
           dissolved firm shall be instituted in any court by or on
           behalf of any person suing as a partner in a firm against
           the firm or any person alleged to be or have been a
           partner in the firm, unless the firm is registered and the
           person suing is or has been shown in the Register of
           Firms as a partner in the firm:

                  Provided that the requirement of registration of
           firm under this sub-section shall not apply to the suits or
           proceedings instituted by the heirs or legal
           representatives of the deceased partner of a firm for
           accounts of a dissolved firm or to realize the property of
           a dissolved firm."
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7.    It may be mentioned that the Maharashtra Amendment of 1984 not

only inserted sub-section 2A in Section 69, it also substituted the original

sub-section (3)(a) to Section 69 by an altogether different sub-section (3)(a).

 

8.    The original sub-section (3)(a) of Section 69 in the Partnership Act

read as follows :

             "(3) The provisions of sub-sections (1) and (2) shall
             apply also to a claim of set-off or other proceeding to
             enforce a right arising from a contract, but shall not
             affect:-

(a)   the enforcement of any right to sue for the dissolution of a firm
      or for accounts of a dissolved firm, or any right or power to
      realize the property of a dissolved firm."

 

9.    The Maharashtra Amendment of 1984 substituted clause (a) of

Section 69(3) of the original Act by the following sub-section (a) :

                    "The firms constituted for a duration of six months
                    or with a capital upto Rs.2000/-"

 

10.   The Maharashtra Amendment also added a proviso to Section 69(1)

which reads as follows:
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                   "Provided that the requirement of registration of
                   firm under this sub-section shall not apply to the
                   suits or proceedings instituted by the heirs or legal
                   representatives of the deceased partner of a firm
                   for accounts of the firm or to realize the property
                   of the firm"

 

11.   The English law in so far as it makes registration compulsory for a

firm and imposes a penalty for non-registration was not followed when the

Partnership Act was made in India in 1932 as it was considered that this

step would be too drastic and would introduce several difficulties. Hence

registration was made optional at the discretion of the partners, but

following the English precedent, any firm which was not registered by

virtue of sub-sections (1)& (2) of Section 69 disabled a partner or the firm

(as the case may be ) from enforcing certain claims against the firm or third

parties (as the case may be) in a Civil Court.

 

12.   An exception to this disability with regard to an unregistered firm was

made in sub-section (3)(a) to Section 69, and this clause enabled the

partners in an unregistered firm to sue for the dissolution of the firm or for

accounts or for realizing the property of the dissolved firm.
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13.   This exception in clause (a) of Section 69(3) was made on the

principle that while registration of a firm is designed primarily to protect

third parties, the absence of registration does not mean that the partners of

an unregistered firm lose all rights in the said firm or its property and hence

cannot sue for accounts or for its dissolution or for realizing their property

in the firm.

 

14.   It may be mentioned that a partnership firm, unlike a company

registered under the Indian Companies Act, is not a distinct legal entity, and

is only a compendium of its partners. Even the registration of a firm does

not mean that it becomes a distinct legal entity like a company. Hence the

partners of a firm are co-owners of the property of the firm, unlike

shareholders in a company who are not co-owners of the property of the

company.

 

15.   Till the Maharashtra Amendment of 1984 came into force on

1.1.1985, a partner in a firm could file a suit for dissolution of an

unregistered partnership firm or for accounts of the dissolved firm or to

recover the properties of the dissolved firm. However, in view of sub-

section 2A of Section 69, since 1.1.1985 a partner in an unregistered
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partnership firm in the State of Maharashtra cannot file a suit for dissolution

or for accounts of a dissolved firm or realize properties of a dissolved firm,

unless the duration of the firm was only six months or it's capital is upto

Rs.2000/-. The question before us is whether sub-section 2A of Section 69

inserted by the Maharashtra Amendment is constitutionally valid.

16.   In our opinion sub-section 2A of Section 69 inserted by the

Maharashtra Amendment violates Articles 14, 19(1)(g) and 300A of the

Constitution of India.

 

17.   It has already been mentioned above that a partnership firm, whether

registered or unregistered, is not a distinct legal entity, and hence the

property of the firm really belongs to the partners of the firm. Sub-section

2A virtually deprives a partner in an unregistered firm from recovery of his

share in the property of the firm or from seeking dissolution of the firm.

 

18.   Article 300A of the Constitution of India states :


             "No person shall be deprived of his property save by
             authority of law."
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19.   It is by now well settled that a law to be valid has to be non arbitrary

vide the 7-Judge Bench decision of this Court in Maneka Gandhi vs.

Union of India and another AIR 1978 SC 597.

 

20.   Sub-section 2A virtually deprives a partner of a firm from his share in

the property of the firm without any compensation. Also, it prohibits him

from seeking dissolution of the firm although he may want it dissolved.

 

21.   Deprivation of property may take place in various ways, such as

`destruction' vide this Court's decision in Chiranjit Lal Chowdhuri vs.

Union of India AIR 1951 SC 41 or `confiscation' vide this Court's decision

in Ananda Behera vs. State of Orissa AIR 1956 SC 17, or revocation of a

proprietary right granted by a `private proprietor' vide this Court's decision

in Virendra Singh vs. State of U.P. AIR 1954 SC 447, `seizure of goods'

vide this Court's decision in Wazir Chand vs. State of H.P. AIR 1954 SC

415 or `immovable property' vide this Court's decision in Virendra Singh

vs. State of U.P. (supra) from the possession of an `individual' vide this

Court's decision in Wazir Chand vs. State of H.P. (supra) or `assumption

of control of a business' vide this Court's decision in Virendra Singh vs.

State of U.P. (supra) in exercise of the `police power' of a State. Thus,
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there is a `deprivation' where a municipal authority, under statutory power,

pulls down `dangerous premises' vide decision in Nathubhai Dhulaji vs.

Municipal Corporation AIR 1959 Bom. 332 or an insolvent is divested of

his `property' vide decision in Vajrapuri Naidu, N. vs. New Theatres,

Carnatic Talkies Ltd. 1959(2) MLJ 469.

 

22.   The appellant challenges the Amendment as violative of Articles 14

and 19(1)(g) of the Constitution. Article 14 guarantees the right to equality

and states that "The State shall not deny to any person equality before the

law or the equal protection of the laws within the territory of India." Equal

protection means the right to equal treatment in similar circumstances. In

other words there can be classification for legitimate purposes, but it is well

settled that the classification must be reasonable i.e. based on intelligible

differentia and having nexus between the basis for classification and the

object of the legislation.

 

23.   Under Article 19(1)(g) of the Constitution all persons have the right

to practice any profession or to carry on any occupation, trade or business.

Clause (6) of that Article enables the State to make any law imposing, in the
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interest of general public, reasonable restrictions on the exercise of the right

conferred under sub-clause (g) of Article 19(1).

 

24.   In Chintamanrao and another vs. The State of Madhya Pradesh

AIR 1951 SC 118 this Court observed :


             "The phrase `reasonable restriction' connotes that the
             limitation imposed on a person in enjoyment of the right
             should not be arbitrary or of an excessive nature, beyond
             what is required in the interest of the public. The word
             `reasonable' implies intelligent care and deliberation,
             that is the choice of a course which reason dictates.
             Legislation which arbitrarily or excessively invades the
             right cannot be said to contain the equality of
             reasonableness and unless it strikes a proper balance
             between the freedom guaranteed in Article 19(1)(g) and
             the social control permitted by clause (6) of Article 19, it
             must be held to be wanting in that quality."

 

25.   Similarly in M.C.V.S. Arunachala Nadar vs. State of Madras

and others AIR 1959 SC 300 where the constitutional validity of the

Madras Commercial Crops Markets Act was challenged, as violative of

Article 19(1)(g), while considering the test of reasonableness to be applied

this Court observed as under :


                    "It has been held that in order to be reasonable, a
             restriction must have a rational relation to the object
             which the legislature seeks to achieve and must not go in
             excess of that object (Chintamanrao and another vs.
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             The State of Madhya Pradesh (supra). The mode of
             approach to ascertain the reasonableness of restriction
             has been succinctly stated by Patanjali Ssastri, C.J. in
             State of Madras vs. V.G. Row AIR 1952 SC 196 :

                          "It is important in this context to bear in
                   mind that the test of reasonableness, wherever
                   prescribed, should be applied to each individual
                   statute impugned, and no abstract standard, or
                   general pattern of reasonableness can be laid down
                   as applicable to all cases. The nature of the right
                   alleged to have been infringed, the underlying
                   purpose of the restrictions imposed, the extent and
                   urgency of the evil sought to be remedied thereby
                   the disproportion of the imposition, the prevailing
                   conditions at the time, should all enter into the
                   judicial verdict."

 

26.   The primary object of registration of a firm is protection of third

parties who were subjected to hardship and difficulties in the matter of

proving as to who were the partners. Under the earlier law, a third party

obtaining a decree was often put to expenses and delay in proving that a

particular person was a partner of that firm. The registration of a firm

provides protection to the third parties against false denials of partnership

and the evasion of liability. Once a firm is registered under the Act the

statements recorded in the Register regarding the constitution of the firm are

conclusive proof of the fact contained therein as against the partner. A

partner whose name appears on the Register cannot deny that he is a partner
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except under the circumstances provided.        Even then registration of a

partnership firm is not made compulsory under the Act. A partnership firm

can come into existence and function without being registered. However,

the Maharashtra Amendment effects such stringent disabilities on a firm as

in our opinion are crippling in nature. It lays down that an unregistered firm

cannot enforce its claims against third parties. Similarly, a partner who is

not registered is unable to enforce his claims against third parties or against

his fellow partners. An exception to this disability was a suit for dissolution

of a firm or a suit for accounts of a dissolved firm or a suit for recovery of

property of a dissolved firm.      Thus a partnership firm can come into

existence, function as long as there is no problem, and disappear from

existence without being registered.        This is changed by the 1984

Amendment extending the bar of the proceedings to a suit for dissolution or

recovery of property as well.      The effect of the Amendment is that a

partnership firm is allowed to come into existence and function without

registration but it cannot go out of existence (with certain exceptions). This

can result into a situation where in case of disputes amongst the partners the

relationship of partnership cannot be put an end to by approaching a court

of law. A dishonest partner, if in control of the business, or if simply

stronger, can successfully deprive the other partner of his dues from the
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partnership. It could result in extreme hardship and injustice. Might would

be right. An aggrieved partner is left without any remedy whatsoever. He

can neither file a suit to compel the mischievous partner to cooperate for

registration, as such a suit is not maintainable, nor can he resort to

arbitration if any, because the arbitration proceedings would be hit by

Section 69(1) of the Act (Jagdish Chandra Gupta vs. Kajaria Traders

(India) Ltd. AIR 1964 SC 1882).

 

27.   In our opinion the restrictions placed by sub-section 2A of Section 69

introduced by the Maharshtra Amendment Act, for the reasons given above,

are arbitrary and of excessive nature and go beyond what is in the public

interest. Hence the restrictions cannot be regarded as reasonable.

 

28.   In the Constitution bench decision of this Court in Maneka Gandhi

vs. Union of India and another (supra) it has been held that arbitrariness

and unreasonableness violates Articles 14 and 19(1)(g) of the Constitution.

The said provision is clearly unreasonable and arbitrary since by prohibiting

suits for dissolution of an unregistered firm, for accounts and for realization

of the properties of the firm, it creates a situation where businessmen will be

very reluctant to enter into an unregistered partnership out of fear that they

will not be able to recover the money they have invested in the firm or to get
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out of the firm if they wish to do so. As already stated above there is no

legal requirement, unlike in England, which makes registration of a firm

compulsory, rather in India it is voluntary. Both registered and unregistered

are legal though of course registration and non registration have different

legal consequences as stated above.

 

29.   The High Court was of the view that the object of the Maharashtra

Amendment was to induce partners to register and it was intended to protect

third party members of the public. We cannot see how sub-section 2A of

Section 69 in any way protects the third party members of the public. It

makes it virtually impossible for partners in an unregistered firm to dissolve

the firm or recover their share in the property of the firm. Hence it is totally

arbitrary.

 

30.   It is true that it has been held by this Court in Government of

Andhra Pradesh & Others vs. P. Laxmi Devi AIR 2008 SC 1640 that

the Court should not lightly declare a statute to be unconstitutional as it

expresses the will of the people through its elected representatives.

However, that does not mean that a statute can never be declared as

unconstitutional. In fact the aforesaid decision this Court has held that in

some circumstances a statute can be declared as unconstitutional, namely,
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where it clearly violates some constitutional provision. Since in our opinion

sub-section 2A of Section 69 as introduced by the Maharashtra Legislature

clearly violates Articles 14, 19(1)(g) and 300A of the Constitution, it is in

our opinion ultra vires and is hence declared unconstitutional.

Consequently
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this appeal is allowed and impugned judgment of the Bombay High Court is

set aside. The suit can now proceed ignoring sub-section 2A which we have

declared invalid. No costs.


                                          ........       .....................
.....J.
                                          (Markandey Katju)

 


                                          .................................J.
                                          (G.S. Singhvi)
New Delhi;
March 20, 2009

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Indian Partnership Act, 1932 -s.69(2A) as introduced by Maharashtra Amendment of 1984 (Maharashtra Act No.29 of 1984)- Constitutional validity of - Held: It is not valid - The provision violates Arts. 14, 19(1)(g) and 300A of the Constitution - It