Case: V. Subramaniam Vs. Rajesh Raghuvandra Rao

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.

Court's reasoning:
16. In our opinion2A 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.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.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 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 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 Maharashtra 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 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.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.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, 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.