Report No. 176
2.32.1 Partnership Act:
Maharashtra Amendment Act (29/84) - amendment to 1996 Act proposed by adding section 42B - accepted. It was brought to the notice of the Commission that though several partnership agreements contain arbitration clauses, certain difficulties are being faced in Bombay because of sub clause (2A) introduced in the Partnership Act, 1932 by the Maharashtra Amendment by Act 29/84, in proceedings for dissolution of a firm or for accounts of a dissolved firm or for realization of its property, where the firms were not registered. Section 69 of the Partnership Act, in so far as relevant, reads as follows:
"Section 69: Effect of non-registration:
(1) No suit to enforce a right arising from a contract or conferred by this Act shall be initiated 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 initiated 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 Firm as partners in the firm.
(3) The provisions of sub sections (1) and (2) shall apply also to a claim 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.
Section 29 of the Maharashtra Amendment Act, 1984 prohibited any suit as is contemplated in sec. 69(3)(a) unless it be one filed by the legal representatives of a deceased partner. The said amendment also amended sec. 69(3) and substituted "sub section (1) and (2)" by the words "sub section (1), 2 and (2A)".
Now, section 69(2) creates a bar to suits to enforce a right arising from a contract or a right conferred by the Act, if it is instituted by an unregistered firm against third parties. Sub section (3) of sec. 69 applies the bar in sec. 69(2) to claims for set-off or "other legal proceedings" but it says that this shall not affect (a) suits for dissolution and accounts of dissolved firm or power to realize the property of a dissolved firm etc.
The word 'other legal proceeding' was constructed by the Supreme Court in Jagdish Chandra vs. Kajaria Traders AIR 1964 SC 1882 as including 'application for appointment of arbitrators' under section 8 (2) of the 1940 Act. That means, normally, a proceeding, including one under the Arbitration Act, 1940 is not barred if it relates to dissolution of the firm or for accounts or for realization of its property, even if the firm is unregistered.
2.32.2 But, the difficulty is created by sub clause (2A) introduced in sec. 69 in Maharashtra. We have noticed that sec. 69(2) itself says that the bar does not apply to suits or proceedings for dissolution and accounts or to realize assets of dissolved firm. But sec. 69(2A) says that no suit for dissolution or accounts of a dissolved firm or any right or power to realize property of a dissolved firm can be claimed by a partner of an unregistered firm.
The Maharashtra Amendment also amends sec. 69(3) stating that the provisions of sub-sections (1) and (2) and 2(A) of section 69 shall apply to suits for dissolution or for accounts or to the power of realizing property of such firms. The effect of sec.69(2A) and the amended sec. 69(3) in Bombay is that the exception in the latter part of sec. 69(3) created under the Central Act in favour of permitting suits or other proceedings for dissolution of a firm, or for accounts or for realizing its property, has become nullified.
In other words neither a suit nor even an application for arbitration under sec. 11 (nor an application in an action under section 8) can be filed if the purpose is to have the unregistered firm dissolved or its accounts finalized or for recovery from its property. Thus, in the state of Maharashtra alone such a disability has arisen. The 1996 Act has therefore become inapplicable in such cases.
This difficulty was placed before the Commission during the Bombay seminar and upon a consideration of the problem, the Commission is of the view that this disability has to be rectified, particularly when today the emphasis is on ADR procedures. The Commission is of the view that so far as partners of an unregistered firm are concerned, they must have the benefit of the 1996 set, for the limited purposes of obtaining dissolution of the firm for settlement of accounts of the unregistered firm or for realization of the property of the dissolved firm.
In other respects, that is to say, except for purposes of the 1996 Act, section 69(2A) and 3 can remain. It appears to the Commission that these limited class of disputes inter-se partners should be allowed to be resolved under the 1996 Act notwithstanding the Maharashtra Amendment Act of 1984. This would obviate the need for passing a preliminary decree for accounts and then a final decree for accounts.
It is true that the provision of section 69 are intended to put pressure on partners to register that firm so that third parties could be put on notice about the partners and their shares in the firm and of facts concerning the firm. The Maharashtra Amendment was intended to put more pressure on parties to register their firm, or else they would not be able to get even, as amongst them, any dissolution of the firm or settlement of accounts nor could they release the property of the dissolved firm.
In the opinion of the Commission, these provisions as amended in Maharashtra shall remain except for the limited extent of enabling arbitration and if that benefit is given, partners can go to arbitration for dissolution of an unregistered firm, or for settlement of accounts of a dissolved firm or for realization of the property of a dissolved firm. It is therefore proposed to rectify this effect by adding section 42B. If Parliament makes a law in this field, the State Amendment shall automatically get superseded under the principle of repugnance.