Arbitration Proceedings by Unregistered Partnership Firms

Introduction

A huge chunk of business in India is carried under the rubric of partnership firms. The quintessential element of partnership between persons, as defined under Section 4¹ of the Partnership Act, 1932² is the agreement amongst them to share the profits of the business carried on by all of the partners or any one of them acting on behalf of all. Therefore, it is important for partners to understand their rights, entitlements and limitations flowing from the Partnership Act.

This research paper focuses on the jurisprudence developed in recent times by the Supreme Court of India in mitigating the severe consequences faced by a partnership firm due to it being non-registered. One such consequence has been described under Section 69(2)³ of the Partnership Act, 1932, which forbids an unregistered partnership firm from instituting a suit arising of a right from a contract against a third party in any court. Further, Section 69(3) of the Partnership Act, 1932 forbids the unregistered partnership firm to a claim of set-off or any other proceedings to enforce a right arising from the contract. Section 69(1) bars inter se disputes, between the partner(s) and the unregistered partnership firm by forbidding institution of suit arising from any right from a contract but also any right arising from the Partnership Act itself. Section 69 also provides a notable exception to this rule: suits can be instituted even by unregistered partnership firm for dissolution of a firm or for accounts, property, etc. of a dissolved firm, for any suit/claim of set-off value not exceeding Rs 100.

This research paper analyses the effect of Section 69 of the Partnership Act, 1932 in arbitration proceedings. Arbitration is a form of an ADR (Alternative Dispute Resolution) which is growing in India, especially for adjudicating commercial disputes. Arbitration proceedings in India are guided by the Arbitration and Conciliation Act, 1996⁴.

Pre-Arbitration and Conciliation Act, 1996 (The Arbitration Act, 1940)

A four-Judge Bench of the Supreme Court in Jagdish Chander Gupta v. Kajaria Traders (India) Ltd.⁵ had the occasion to examine the effect of Section 69 of the Partnership Act, 1932 on initiation of arbitration proceedings. In this case, dispute arose between two partners of an unregistered partnership firm. The partnership agreement between the parties contained an arbitration clause. However, on a petition under Section 8(2)⁶ of the Arbitration Act, 1940⁷ (pari materia to Section 11(6)⁸ of the Arbitration and Conciliation Act, 1996) being filed in the High Court, the appellant (J.C. Gupta) took the plea that Section 8 of the Arbitration Act, 1940 is not applicable in cases of unregistered partnership firms in view of the express bar mentioned in Section 69(3) of the Partnership Act, 1932 prohibiting any “other proceedings” with respect to enforcement of a right arising from any agreement. In sum and substance, the argument of the appellant was that arbitration proceedings were included in the scope of the phrase “other proceedings” as used in the Partnership Act, 1932 and hence barred. However, the High Court vide a 2:1 split decision rejected the aforementioned plea and appointed an arbitrator under Section 8(2) of the Arbitration Act, 1940. This was challenged before the Supreme Court.

Before going any further, it is important to reproduce Section 69 of the Partnership Act, 1932.

“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 suits 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 firm.

(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 realise the property of a dissolved firm; or

(b) the powers of an official assignee, receiver or Court under the Presidency-Towns Insolvency Act, 1909⁹ (3 of 1909) or the Provincial Insolvency Act, 1920¹⁰ (5 of 1920) to realise the property of an insolvent partner.

(4) This section shall not apply,—

(a) to firms or to partners in firms which have no place of business in the territories to which this Act extends, or whose places of business in the said territories, are situated in areas to which, by notification under Section 56, this chapter does not apply; or

(b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the Presidency-towns, is not of a kind specified in Section 19¹¹ of the Presidency Small Cause Courts Act, 1882¹² (5 of 1882), or, outside the Presidency-towns, is not of a kind specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887 (9 of 1887), or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim.”

The plea raised before the Supreme Court by the appellant (J.C. Gupta) was that the phrase used in Section 69(3) of the Partnership Act, 1932 being “claim of set-off or other proceeding”. Therefore, the phrase “other proceedings” should be read ejusdem generis with the phrase that comes before it i.e. “claim of set-off”, to narrowly interpret the meaning of the phrase “other proceedings” and not include arbitration proceedings within its sphere. Ejusdem generis is rule to interpret statutes which means that “when in a statute particular classes are mentioned by name and then are followed by general words, the general words are sometimes construed ejusdem generis i.e. limited to the same category or genus comprehended by the particular words”¹³.

The plea to not give the full and usual meaning to the phrase “other proceedings” was dismissed by the Court and the Court held:

“6. It follows, therefore, that interpretation ejusdem generis or noscitur a sociis need not always be made when words showing particular classes are followed by general words. Before the general words can be so interpreted there must be a genus constituted or a category disclosed with reference to which the general words can and are intended to be restricted. Here the expression “claim of set-off” does not disclose a category or a genus. Set-offs are of two kinds—legal and equitable—and both are already comprehended and it is difficult to think of any right “arising from a contract” which is of the same nature as a claim of set-off and can be raised by a defendant in a suit.

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9. In our judgment, the words “other proceeding” in sub-section (3) must receive their full meaning untrammelled 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 except those expressly mentioned as exceptions in sub-section (3) and sub-section (4).¹⁴”

Therefore, the appeal was allowed and the judgment of the High Court was overturned and the application under Section 8(2) of the Arbitration Act, 1940 was dismissed. Further, the Court had also observed that since the partnership agreement contained the arbitration clause, the proceedings under Section 8 of the Arbitration Act, 1940 was arising to enforce a right from that agreement.

Post-Arbitration and Conciliation Act, 1996

However, the judicial attitude towards the harsh consequences of non-registration of partnership firms begin to sober after the exponential growth of arbitration as an additional dispute resolution method for the commercial sector in India.

In Kamal Pushp Enterprises v. D.R. Construction Co.¹⁵, a 2-Judge Bench of the Supreme Court had the occasion to examine the question whether a post-arbitral enforcement proceedings is barred by the effect of Section 69 of the Partnership Act, 1932. In this case, however, the Supreme Court differed from its previous ruling in Jagdish Chander Gupta¹⁶ on the grounds that firstly, the prohibition contained under Section 69 of the Partnership Act, 1932 has no application before proceedings before an arbitrator and secondly, the Court also observed that the enforcement proceedings of an award cannot be categorised as a suit or “other proceedings” to enforce rights under a contract as the genesis of the enforcement proceeding is the award/decree.

Although this was a significant change in judicial attitude since the law was first expositioned in Jagdish Chander Gupta¹⁷, however, the research paper shows that it was not until the judgment of Umesh Goel v. H.P. Coop. Group Housing Society Ltd.¹⁸, that the Supreme Court through a well-reasoned judgment distinguished Jagdish Chander Gupta¹⁹.

A two-Judge Bench of the Supreme Court in Umesh Goel case²⁰ had the occasion to examine this issue. The award passed by an arbitrator in favour of the unregistered partnership firm (Umesh Goel) was set aside by the High Court on the ground that any counterclaim by unregistered partnership firm was explicitly barred by application of Section 69(3) of the Partnership Act, 1932. However, the Supreme Court overruled the impugned judgment of the High Court and upheld the award.

The Court held that the bar as mentioned in Section 69 of the Partnership Act, 1932 is regarding proceedings before a court and arbitration proceedings are not covered within the meaning of “courts”. It is worthy to note that “court” has neither been defined under the Partnership Act, 1932 nor the Contract Act, 1872²¹ however, it has been defined under Section 2(1)( e)²² of the Arbitration and Conciliation Act, 1996.

2. Definitions.—(1) * * *

(e) “Court” means—

(i) in the case of an arbitration other than international commercial arbitration, the Principal Civil Court of Original Jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal civil court, or any Court of Small Causes;…

It is more than evident that arbitration proceedings are not the same as “courts” and therefore, not unapproachable by the unregistered partnership firm.

The court further, distinguished the earlier 4-Judge Bench decision in Jagdish Chander Gupta²³ on the grounds that the arbitration proceedings in Jagdish Chander Gupta case²⁴ was sought to be instituted under the Arbitration Act, 1940 (the old Arbitration Act). The arbitral proceedings initiated under the old Act, unlike those initiated under the Arbitration and Conciliation Act, 1996, were virtually in nature of a suit in civil court due to the constant superintendence of all the proceedings by civil courts.

The comparative analysis between the Arbitration Act, 1940 and the Arbitration and Conciliation Act, 1996 is best narrated in the words of the court.

“27. A comparative consideration of the 1940 Act and the 1996 Act disclose the extent of control and operation of a court under the former Act was far more intensive and elaborate than the latter Act. The more significant distinction as between the 1940 Act and the 1996 Act is clear to the position that the former Act does not merely stop with the initiation and enforcement of an arbitration and its award, but effectively provides for intervention at every stage of the arbitral proceedings up to its final consideration and enforcement as if it were a regular civil suit, whereas under the 1996 Act, the scope of intervention is not that of a civil court as it could do in the matter of a suit. Such clear distinction could be discerned from the reading of the various provisions of both the Acts.²⁵”

Conclusion

That the law laid down by the Supreme Court in Umesh Goel case²⁶ and Kamal Pushp Enterprises v. D.R. Construction Co.²⁷, allowing unregistered partnership firm to make claims/counterclaims in arbitral proceedings is a welcome step in the right direction given bulk of commercial disputes are being resolved through arbitration and further, genuine claims and damages of unregistered partnership firm are not being dismissed on mere technical grounds. Further the law laid down by the Supreme Court in aforementioned cases has been followed by subsequent Benches of the Supreme Court and High Court²⁸ without being distinguished. Therefore, it can be confidently asserted that law regarding making of claim/counterclaim by unregistered partnership firm in arbitrations has stabilised.