By Mili Budhiraja, student at the Faculty of Law, University of Delhi
Under the Indian Partnership Act (“Act”), 1932, registration of partnership is not mandatory. But there are important repercussions of the non-registration of firms, as prescribed in Section 69 of the Act, which practically necessitates the registration at one time or the other. Section 69(3) of the Act has attracted much discourse because of the ambiguity in relation to the interpretation of the phrase “other proceedings”. The Supreme Court in the case of Umesh Goel v. Himachal Pradesh Cooperative Housing Society Ltd., held that the arbitration proceedings do not fall within the ambit of “other proceedings” and therefore, arbitration proceedings are not hit by the bar of Section 69. Through this piece, the application of the ingredients of the section will be analysed in the light of the decision of the Supreme Court in the case of Umesh Goel.
Dissection of Section 69 of the Partnership Act
Section 69 of the Act prohibits the institution of certain suits in respect of partnerships which have not been registered under the Act. The disability cast is compulsive and comprehensive, and lends no escape from it. The sub-section (1) of Section 69 essentially imposes a ban on the partner of an unregistered firm to file a suit against the firm or any of its partners to enforce a right arising from a contract or under the Partnership Act. The object is to prevent a partner from enforcing his claims against the fellow partners if the firm is an unregistered one. Under Section 69(2), the very same ban is imposed on an unregistered firm against any third party at the instance of such an unregistered firm. In essence Section 69(2) states that an unregistered firm shall not be able to file a suit to enforce a right arising from a contract. Coming on to Section 69(3), which is under the lens of analysis, it will be pertinent to mention the ingredients of the Section in verbatim. It states:
“(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of setoff or other proceedings to enforce a right arising from a contract but shall not affect
(a) the firms constituted for a duration upto six months or with a capital upto two thousand rupees; or;
(b) the powers of an official assigned, receiver or Court under the Presidency Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an insolvent partner.”
Hence, Section 69(3) cannot be read in isolation due to the explicit incorporation of subsections (1) & (2) of Section 69 in the third sub-section. The two subsections have to be entirely lifted and incorporated in sub-section (3).The moot issue in the case of Umesh Goel was whether the expression other proceedings will include Arbitral proceeding or not. While the court categorically held that the operation of Section 69(3) will not apply to Arbitral proceeding, it is pertinent to note that Section 69(3) also holds the expression “to enforce a right arising from a contract”. It is in this light that the author contends that the decision in Umesh Goel in effect leads to the misuse of Arbitration clause by unregistered firms.
The Court in the case of Umesh Goel analysed if the Arbitration proceeding can be qualified as a court proceeding. It was contended that Section 36 of the Arbitration and Conciliation Act, 1996, renders an Arbitral Award as a decree, so Arbitration Proceedings shall be considered a court proceeding. But the court held that Section 36 only creates a statutory fiction, and by no stretch of imagination, the arbitrator can be held to be a court. The court relied upon the decision in State of West Bengal v. Sadan K. Bormal, wherein it was observed that while doing interpretation of a provision creating a legal fiction, the Court must ascertain the purpose for which the fiction is created. It must not be extended beyond the purpose for which it is created or beyond the language of the Section. The principle has been succinctly stated by Lord Asquith in East End Dwelling v. Finsbury Borough Council.
It is not contended by the author that the arbitration proceeding must be considered a court proceeding, but by excluding it from the ambit of this section, a modality exists for bypassing the essence of this ban. The interpretation of “other proceedings” should not be carried out in a very literal and restrictive manner. In Jagdish Chander Gupta v. Kajaria Traders, the court made a very pertinent observation while interpreting the expression “other proceedings” and held,
“…the words other proceeding in sub-section (3) must receive their full meaning untrammeled by the words a claim of set-off. The latter words neither intend nor can be construed to cut down the generality of the words other proceeding. The sub-section provides for the application of the provisions of sub-sections (1) and (2) to claims of set-off and also to other proceedings of any kind which can properly be said to be for enforcement of any right arising from contract.”
It is to be noted that it has recently become a general practice between the contracting parties to insert arbitration clause into their agreements. Excluding arbitration proceedings from the ambit of this impugned section would result in the effect of letting the unregistered party taking the other way for enforcing rights arising out of a contract. While interpreting a legal provision it is pertinent to refer back to the objective it seeks to attain. Here, essentially the ban seeks to curtail the unregistered firm or the partners constituting such firm to institute a suit in a court. It is to restrict them to enforce rights arising out of a contract due to their nature of an unregistered firm. Since arbitration would be resorted to in the event when arbitration clause would form part of the agreement, so in effect initiating arbitration proceeding would arise from the contract itself, and shall be barred.
It shall be pertinent to mention at this stage that at the stage of enforcement of the award, the rights of the parties are crystallised and fall outside the purview of any bar. So the award is conveniently enforceable since the nature of the same does not remain an ounce similar to that of the proceedings mentioned under the section. But this is exactly why the interpretation of the court in Umesh Goel is problematic because it allows moving of the arbitration proceedings by an unregistered firm, and further facilitates the enforcement of the award.
Arbitration has been rising to the fore as the default commercial dispute resolution mechanism. It should be given the recognition of a formal legal process. The courts in India have preferred an interpretation which excludes it from the ambit of proceedings which in effect, result into giving a leeway to parties to take the backdoor for enforcement of rights. The fundamental principle that flows from the colourable legislation in the constitutional scheme is that what shall not be done directly, shall not be done indirectly as well. And so, the resultant effect of the interpretation in Umesh Goel finds fault with the generality of principles.