Holding

Section 69(2) bars a suit only when the unregistered firm seeks enforcement of a right arising from a contract it entered into with the third party in the course of its business; here the contract was with the erstwhile proprietor, so the bar does not apply.

Summary

The Supreme Court examined an appeal by Purushottam (and others) against Shivraj Fine Art Litho Works concerning a suit filed by an unregistered partnership firm to recover sums owed for goods supplied before the firm’s registration. The High Court had dismissed the suit, holding it barred under Section 69(2) of the Indian Partnership Act and that subsequent registration could not cure the defect. The Court considered whether the bar applies only to contracts entered into by the unregistered firm with a third party in the course of its business, whether later registration cures the defect, and whether a partner can sue in his personal capacity. Relying on precedents such as Shreeram Finance Corp., D.D.A. v. Kochhar Construction, and Haldiram Bhujiawala, the Court held that the contract in question was between the erstwhile proprietor and the defendant, not the unregistered firm, so Section 69(2) did not apply. Consequently, the appeal was allowed, setting aside the High Court judgment and restoring the lower court decree.

Issues considered

Whether Section 69(2) of the Indian Partnership Act bars a suit by an unregistered firm when the right sought does not arise from a contract to which the firm is a party or is not in connection with its business.
Whether subsequent registration of a partnership firm cures the defect of filing a suit while the firm was unregistered.
Whether a partner in his personal capacity can sue for a claim that the partnership, being unregistered, cannot enforce.
Whether the bar under Section 69(2) applies when the contract is with the erstwhile proprietor rather than the unregistered firm.

Legislation cited

Indian Partnership Acts. 69(2)

Subjects

Partnership lawUnregistered firmSection 69(2)Contract enforcementRegistration of partnershipCivil procedurePartner liability

Judgment

A PURUSHOTTAM AND ANR
v.
SHIVRAJ FINE ART LITHO WORKS AND ORS
.-.
NOVEMBER 7, 2006

B [B.P. SINGH AND AL TAMAS KABIR. JJ.]

Indian Partnership Act,

Section 69(2)-bar under-scope ofexplained
c
The question involved in the instant appeal was whether a suit by an
unregistered firm to enforce a right not arising from a contract to which it
was a party or arising from a contract entered into by it in connection with
its business, but for the enforcement of a right arising out of a contract ..
/

D entered into by its partner when the firm was his proprietary concern which
he continued to the partnership when constituted was maintainable against
third party and not barred under the provisions of section 69(2) of the Indian
Partnership Act

Allowing the appeals, the court
E HELD. 1.1 Once registration is granted, even though after the filing of
the suit, the suit should be held to be maintainable as from the date on which
registration is granted subject to the law of limitation. Subsequent registration
of the firm would not cure the initial defect in the filing of the suit.
(527-F-G; 528-D]
F Mls.Shreeram Finance Corporation v. Yasin Khan and Ors, (1989] 3
SCC 476; D.D.A. v. Kochhar construction Work and Anr., (1998) 8 SCC 559
and U.P. State Sugar corporation ltd v. Jain Construction Co. and Anr., (2004)
7 sec 332, relied upon.
1.2. After coming into the existence of the partnership and having
G transferred to the said partnership all his assets and liabilities of his
proprietary concern, the erstwhile proprietor has no subsisting exclusive
right to enforcl; the liability against others since such rights as he had as
the proprietor vested in the partnership, Such a partner in his personal
capacity could not sue the respondent firm.for the amount in question, ifthe

H 524
PURUSHOTTAM v. SHIVRAJ FINE ART LITHO WORKS [B.P. SINGH, J.]525

firm of which he was a partner was for reason of non-registration unable A
maintain a suit. He can not, therefore, either file a suit for claim any relief in
the suit filed by the partnership asserting his right as the erstwhile proprietor.
[529-F-G)
Addanki Narayanappa and Anr. v. Bhaskara Krishnappa (D) <It Ors.,
[1966) 3 SCR 400, relied upon. B
1.3. The bar under Section 69(2) would apply to a suit for enforcement
of right arising from a contract entered into by the unregistered firm with a
third party in the course of business dealings with such third party. If the
right sought to be enforced does not arise from a contract to which the
unregistered firm is a party, or is not entered into in connection with the
business of the firm with a third party, the bar of Section 69(2) will not apply. C
[53~E-F)

Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and Anr.,
[2000] 3 sec 25, relied upon.
Raptakos Brett & Co. Ltd. v. Ganesh Property, (1998) 7 SCC 184, D
referred to.
2.1. Observations made and principles laid down in a judgment if obiter
do not have the force of a binding precedent However, that does not preclude
the Court from appreciating the reasons given for the principles laid down,
and if the reasoning appears to the Court to be cogent, and merits acceptance, E
the same may be accepted by the Court and applied to the case before it
[531-F-G)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4092of1998.
From the Judgment and Order dated 10.4.1992 of the High Court of
Judicature at Bombay, Nagpur Bench, Nagpur in First Appeal No. 35/1998. F
V.A. Mohta, B.J. Aggarwal, S.G. Hartalkar, J.S. Wad, Ashishwad, Neeraj
Kumar, Arvind Gupta and Simanti Chakrabarti for the Appellant.

S.V. Deshpande, Prashant Kumar, V. Sheshagiri and Rahul Prasanna G
Dave for the Respondents.

The Judgment of the Court was delivered by

B.P. SINGH, J. In this appeal by special leave the plaintiffs are the
appellants. Their suit against original defendant nos. I to 9 was decreed for H
the sum of Rs.8,92,815.14 by the Third Joint Civil Judge (Senior Division),

-
526 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A Nagpur in Civil Suit No.52 of I 980. On appeal by original defendants I to
3, the High Court in First Appeal No.35 of I988 by its impugned judgment
and order of April 10, 1992 allowed the appeal and dismissed the suit
holding that in view of the provisions of Section 69(2) of the Indian
Patnership Act (hereinafter referred to as the 'Act'), the suit was not
.B maintainable, the plaintiff being an unregistered firm.

The facts of the case are not in dispute and they will be briefly
noticed. Plaintiff No. I, Pursushottam, carried on business as whole-sale
paper merchant in the name and style of "Dinesh Paper Mart" as the sole
proprietor of the concern. During this period he supplied goods to the
C defendant firm namely - Shivraj Fine Arts Litho Works, a firm registered
under the Partnership Act. Defendants 2 to 9 were the partners of the said
firm. In the year I 974, Special Civil Suit No.9 of I 974 was filed for dissolution
of the defendant partnership firm and for rendering of accounts. During the
pendency of the suit a receiver was appointed initially to take possession
D of the properties of the firm and to run the business of the firm. Later joint
receivers were appointed, and it is not in dispute that at the relevant time
defendant No.2 and defendant No.12 were in management of the aforesaid
registered firm - respondent No. I herein as joint receivers.

The aforesaid Purushottam had business dealings with the respondent
E No. I firm. Goods were supplied and payments made from time to time. It is
not in dispute that the amounts due and payable to the plaintiff No.I,
Purushottam were fully paid up as on March 20, 1974, that is, before the
date of appointment of Receiver. Even after appointment of the Receiver,
successive Receivers purchased goods from Plaintiff No. I, Purushottam,
herein for the business of respondent No. I - firm. A khata was maintained
F by plaintiff No. I - Purushottam in which payments made were duly entered,
and at the end of the year the amount outstanding as on December 31, was
carried forward to the next year. The defendant firm acknowledged their
liability to pay the amount entered in the khata by making an endorsement
in the khata. As at the end of the financial year I979 a sum ofRs.6,22,713.06
G was the balance due from the defendant firm to plaintiff Purushottam. The
plaintiff was also entitled to interest at the agreed rate of I 8% per annum
on the balance outstanding for more than seven days.

With effect from January I, I 980 the proprietary firm of Purushottam
(Plaintiff No.I) was taken over by a partnership of which plaintiff Purushottam
H was also a partner. The said pa~nership firm took over all the assets and
PURUSHOTTAM v. SHIVRAJ FINE ART LITHO WORKS [B.P. SINGH, J.]527

liabilities of "Dinesh Paper Mart" and continued their business in the same A
name. Though the said partnership finn came into existence on January I,
1980, an application for registration of the finn under the Act was made on
January 14, 1980. While the said application was pending, the instant suit was
filed on March 31, 1980. Later, on November 29, 1980, the PlaintiffNo.2 finn
was granted registration under the Act. It would thus appear that though the B
newly constituted partnership firm had applied for registration on January 14,
1980, on the date on which the suit was filed, that is on March 31, 1980, it
was an unregistered firm and registration was granted later on November 29,

-
1980. This therefore, gave rise to the objection urged on behalf of the defendants
relying on Section 69(2) of the Act that the suit by an unregistered finn was
not maintainable to enforce a right arising from a contract. C
The High Court took the view relying upon authorities that the suit was
barred by Section 69(2) of the Act, and even if registration was subsequently
granted, that would not cure the defect. Repelling the argument that in any
event Plaintiff No. I, the erstwhile proprietor may be entitled to enforce his D
claim, the Court held that once he had transferred his rights to the partnership
which took over all the rights and liabilities of the proprietary concern, he lost
his exclusive right to recover the amount since that had become an asset of
the partnership finn over which he as a partner had no exclusive right. He,
therefore, did not have any enforceable subsisting claim after the partnership
came into existence, and, therefore, no relief could be granted to him in his E
personal capacity as erstwhile proprietor of the concern.

Shri V.A. Mohta, Sr. Advocate, appearing on behalf of the appellan~s
before us advanced three main submissions. Firstly, he submitted that once
registration is granted, even though after the filing of the suit, the suit should F
be held to be maintainable as from the date on which registration is granted
subject to the law of limitation. Secondly, he submitted that Plaintiff No.I,
Purushottam in his personal capacity could sue the respondent firm for the
amount in question, if the firm of which he was a partner was for reason of
non-registration unable to maintain a suit. Lastly, he submitted that Section
69(2) of the Act is not attracted to a case where the contract in question is G
not with the unregistered finn and for this he relied on the judgment of this
Court in Haldiram Bhujiawala and Anr. v. Anand Kumar Deepak Kumar and
Anr., [2000] 3 sec 250.

In Mls.Shreeram Finance Corporation v. Yasin Khan and Ors., [1989] H
3 SCC 476; it was held by this Court that a suit filed by the existing partners
528 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A of the firm after reconstitution was not maintainable if the newly added
partners were not shown as partners in the Register of Firms under the Act.
In that case the suit was filed in the name of the current partners as on the
date of the suit, whose names were not shown as partners in the Register of
Firms maintained under the Act. It is no doubt true that in the aforesaid
B decision the bar was attracted not on account of non-registration of a
partnership firm but on account of the fact that the persons suing had not
been shown in the Register of Firms as partners of the firm. Counsel for the
respondent submitted that Section 69(2) of the Act is mandatory and unless
the conditions specified therein are fulfilled, a suit by a partnership Firm will
be hit by the bar contained in that provision.
c The question as to whether the subsequent registration of the firm
would cure the initial defect in the filing of the suit arose for consideration
in D.D.A. v. Kochhar Construction Work and Anr., [1998] 8 SCC 559. This
Court held that in view of the clear provision of the Act it was not possible
·''
to subscribe tu the view that subsequent registration of the firm may cure the
D initial defect, because the proceedings were ab initio defective as they could
not have been instituted since the firm in whose name the proceedings were
instituted was not a registered firm on the date of the institution of the
proceedings. This Court also noticed the difference of opinion amongst the
High Courts and concluded thus:-

E "Counsel for the respondents, however, ir.1ited our attention to two
decisions which take a view that subsequent registration of the firm
can cur_e the initial defect provided the registration is before the
period of limitation has run out. Our attention was drawn to MS.A.
Subramania Mudaliar v. East Asiatic Co. Ltd. and Atmuri
F Mahalakshmi v. Jagadeesh Traders. HoY1ever, the High Court of
Patna in Laduram Sagarmal v. Ja;nuna Prasad Chaudhuri and the
High Court of Madras in T Savariraj Pillai v. R.S.S. Vastrad & Co.
take a contrary view and hold that the suit is incompetent ab initio.
We have considered these decisions, but in the light of the plain
language of Section 69 of the Partnership Act read with Section 20 of
G tile Arbitration Act and in view of the decision of this Court reported
in Shreeram Finance Corpn. We are clearly of the opinion that
proceedings under Section 20 of the Arbitration Act were ab initio
defective since the firm was not registered and the subsequent
registration of tl:e firm cannot cure that defect".

H
- PURUSHOTTAM v. SHIVRAJ FINE ART LITHO WOkKS [B.P. SINGH, J.]529

The same view was also reiterated in U.P. State Sugar Corporation Ltd. v.
Jait1 Construction Co. and Anr., [2004] 7 SCC 332.
A

.. These decisions squarely answer the first submission of Shri V.A. Moh ta.
The submission must therefore be rejected .

The second submission urged on behalfofthe appellants is also squarely B
answered by a judgment of this Court reported in Addanki Narayanappa and
Anr. v. Bhaskara Krishnappa (D) & Ors., [1966] 3 SCR 400. This Court held:

"It seems to us that looking to the scheme of the Indian Act no other
view can reasonably be taken. The whole concept of partnership is
to embark upon a joint venture and for that purpose to bring in as C
capital money or even property including immovable property. Once
that is done whatever is brought in would cease to be the exclusive
property of the person who brought it in. It would be the trading asset
of the partnership in which all the partners would have interest in
proportion to their share in the joint venture of the business of D
partnership. The person who brought it in would, therefore, not be
able to claim or exercise any exclusive right over any property which
he has brought in, much less over any other partnership property. He
would not be able to exercise this right even to the extent of his share
in the business of the partnership. As already stated, his right during
the subsistence of the partnership is to get his share oi profits from E
time to time as may be agreed upon among the partners and after the
dissolution of the partnership or with his retirement from partnership
of the value of his share in the net partnership assets as on the date
of dissolution or retirement after a deduction of liabilities and prior
charges."
F
The High Court has, therefore, rightly held that the partnership having
come into existence of which Plaintiff No. I was a partner, and he having
transferred to the said partnership all his assets and liabilities of his proprietary
concern, he had no subsisting exclusive right to enforce the liability against
the defendants since such rights as he had as the proprietor vested in the G
partnership. He could not therefore either file a suit or claim any relief in the
suit filed by the partnership asserting his right as the erstwhile proprietor. The
second submission also fails.

This brings us to a consideration of the third submission that the bar
in Section 69(2) of the Act is not attracted to a suit in which the contract in H
530 SUPREME COURT REPORTS [2006) SUPP. 8 S.C.R.

A question is not with the unregistered firm which is the plaintiff. Counsel
placed considerable reliance on the judgment of this Court in Haldiram

..
Bhujiawala and Anr. (supra), and submitted that the principles laid down
therein applied to his case with full force. On the other hand, the respondents
insist that the case is clearly distinguishable on facts, and in any case the
B observations relied upon by the appellants do not constitute the ratio, as it
was wholly unnecessary to go into the question which did not fall for
consideration after the first question was answered in favour of the appellants.

It therefore becomes necessary for us to notice the relevant facts of the
case, the. questions that fell for consideration, and the principles laid down
C therein.

The plaintiffs in the suit were the sons of Moolchand, the first plaintiff
being the partnership firm of which three of his sons were partners, and the
second plaintiff being his fourth son. Their case was that the partnership of
which their late father M<:>olchand was a partner was the duly registered
D proprietor of the trademark Haldiram Bhujiawala. On dissolution of the firm on
16.11.1974 in terms of the deed of dissolution, Moolchand became the sole
proprietor of the trademark for the whole country except State of West Bengal.
Smt. Kamla Devi, another partner, who was the wife of R.L. Aggarwal a
brother ofMoolchand, was given ownership of the trademark rights for West
Bengal. Upon the death of Moolchand in 1985 his four sons got themselves
E recorded as joint proprietors of the trademark. Three of th'!m formed a
partnership in the year 1983 and were running a shop in Chandni Chowk,
Delhi.

In the meantime on 10.10.1977 R.L. Aggarwal and his son applied in
F Calcutta for registration of the same trademark in their name claiming to be
full owners of the trademark, without disclosing thl" dissolution deed of
16.11.1974. In these circumstances a suit wac; filed by the partnership firm with
three of the sons of Moolchand as partn_ers thereof being the first plaintiff.
The second plaintiff in the suit was the fourth son of Moolchand. They
claimed the relief of injunction restraining the defendants from using the said
G trademark, damages, and for destruction of the material etc. The defendants
filed an application under Order 7, Rule 11, CPC for summary dismissal of the
suit since Plaintiff No. I partnership firm vias not a registered partnership firm
on the date of the filing of the suit. The Trial Court dismissed the application
and so did the .appellate bench of the High Court of Delhi. The defendants
G appealed to this Court by Special Leave.
.. PURUSHOTTAM v. SHIVRAJ FINE ART LITHO WORKS [B.P. SINGH, J.]531

Two questions were framed which arose for consideration. A
"(i) Whether Section 69(2) bars a suit by a firm not registered on

- the date of suit where permanent injunction and damages are claimed
in respect of trademark as a statutory right or by invoking common
law principles applicable to a passing-off action?
B
(ii) Whether the words "arising from a contract" in Section 69(2)
refer only to a situation where an unregistered firm is enforcing a right
arising from a contract entered into by the firm with the defendant
during the course of its business or whether the bar under Section
69(2) can be extended to any contract referred to in the plaint
unconnected with the defendant, as the source of title to the suit C
property?"

The first question was answered relying upon the law laid down by this
Court in Raptakos Brett & Co. Ltd v. Ganesh Property, [l 998] 7 SCC 184 that
the bar in Section 69(2) of the Act did not operate to bar a suit by an
unregistered firm seeking enforcement of a statutory right or a common law D
right. It was held that a passing off action being a common law action based
on tort, and not on contract, Section 69(2) did not apply. The reliefs of
permanent injunction and damages were claimed on the basis of infringement
of registered trademark. Thus the suit was held to be one based on statutory
right under the Trade Marks Act, and therefore not barred by Section 69(2). E
Counsel for the respondents contended before us that having answered
the first question in favour of the plaintiffs, it was wholly unnecessary for the
disposal of the appeal to consider the second question formulated by this
Court. Therefore, any observation made or principle enunciated, in relation to
the second question was at best obiter, and not a binding precedent. F
We shall assume in favour of the respondents that the observations
made and principles laid down are obiter ami therefore not a bind precedent.
Even so that does not preclude this Court from appreciating the reasons
given for the principles laid down, and if the reasoning appears to this Court
to be cogent, and merit acceptance, the same may be accepted by this Court G
as its own and applied to the case before it.

In Haldiram Bhujiawala and Anr. (supra) this Court noticed the
recommendations made by the Special Committee in its report which was
considered by the legislature while enacting the Partnership Act, 1932. The H
532 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A Committee recommended that registration of firms be made optional as it
considered making registration compulsory too drastic for a beginning in
India. It was proposed that registration should lie entirely with the discretion
of the firm or partner concerned, but any firm which was not registered will
be unable to enforce its claim against third parties in the civil court; and any
partner who is not registered will be unable to enforce his claims either
B against third parties or against fellow partners. Paragraphs 18 and 19 of the
Report read ·as follows :-

"18. Once registration has been effected the statement recorded in the
register regarding the constitution of the firm will be conclusive proof
of the facts therein contained against the partners making them and
c no partner whose name is on the register will be permitted to deny
that he is a partner with certain natural and proper exceptions which
will be indicated later. This should afford a strong protection to
persons dealing with firms against false denials of partnership and the
evasion of liability by the substantial members of a firm.
D
19 ...... On the other hand, a third party who deals with a firm and
knows that a new partner has been introduced can either make
registration of the new partner a condition for further dealings, or
content himself with the certain security of the other partners and the
chance of proving by other evidence, the partnership of the new but
E unregistered partner. A thir<j party who deals with a firm without
knowing of the addition of a new partner counts on the credit of the
old partners only and will not be prejudiced by the failure of the new
partner to register".

It would thus appear that registration of a firm was conceived as a
F protection to third parties dealing with a partnership firm. Registration ensured
the certainty of existence of the firm and its membership, so that later an
unsuspecting third party contracting with the firm may not run the risk of
being defeated on discovery that neither the partnership firm nor its partners
existed in fact. On the other hand, an unregistered firm could not bring a suit
G for enforcing its right arising from a contract.

In Raptakos Brett & Co. ltd. (supra) this court after noticing Section
69 of the Act observed :

"A mere look at the aforesaid provision shows that the suit filed by
an unregistered firm against ~ third party for enforcement of any right
H
PURUSHOTTAM v. SHIVRAJ FINE ART LITHO WORKS [B.P. SINGH, J.]533

arising from a contract with such a third party would be barred at its A
very inception. To attract the aforesaid bar to the suit, the following
conditions must be satisfied:

(i) That the plaintiff-partnership firm on the date of the suit must
not be registered under the provisions of the Partnership Act and
consequently or even otherwise, the persons suing are not shown in B
the Register of Firms as partners of the finn, on the date of the suit.

(ii) Such unregistered finn or the partners mentioned in the sub-
section must be suing the defendant-third party.

(iii) Such a suit must be for enforcement of a right arising from a C
contract of the finn with such a third party".

Relying upon the aforesaid analysis this Court in Haldiram Bhujiawala
and Anr. (supra) held that the contract contemplated by Section 69 of the Act
is the contract entered into by the finn with the third party defendant. The
contract by the unregistered finn referred to in Section 69(2) must not only D
be one entered into by the firm with a third party defendant, but must also
be one entered into by the plaintiff firm in the course of the business dealings
of the plaintiff finn with such third party defendant.

With respect, we find ourselves in complete agreement with the principles
enunciated in Haldiram Bhujiawala and Anr. (supra). Having regard to the E
purpose Section 69(2) seeks to achieve <l;nd the interest sought to be protected,
the bar must apply to a suit for enforcement of right arising from a contract
entered into by the unregistered finn with a third party in the course of
business dealings with such third party. If the right sought to be enforced
does not arise from a contract to which the unregistered finn is a party, or F
is not entered into in connection with the business of the unregistered finn
with a third party, the bar of Section 69(2) will not apply.

In the instant case the contract was entered into with the respondent
finn by the erstwhile proprietor of the concern namely Purushottam. The
partnership firm came into existence later. The amount claimed in the suit were G
due to the proprietor Purushottam who carried on his proprietary business in
the name and style of"Dinesh Paper Mart". When he entered into partnership
with others, he contributed to the partnership by way of his contcihution to
the capital, all the assets and liabilities of his erstwhile proprietary concern.
Thus, though the partnership finn, which was unregistered, became entitled
H
534 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A to enforce the contractual obligation of the defendant finn which it owed to
Purushottam, the contract was not one entered into by the unregistered finn
with a third party,,nor was it one entered into by the unregistered finn in th.e
course of its business dealings with the defendants. So viewed, the bar of
Section 69(2) cannot apply to the suit filed by the Plaintiff - appellants.

B We, therefore, allow this appeal with costs and set aside the impugned
judgment and decree of the High Court and restore that of the Third Joint·
Civil Judge (Senior Division) Nagpur, in Civil Suit No.52 of l 980 dated 29.4.1987.

BK Appeal allowed.