2009 (3) TMI 1032 - SC - Indian Laws

Section 69(2A) of Indian Partnership Act Unconstitutional: Violates Articles 14, 19(1)(g), 300A; Unreasonable Restrictions Removed.

V. Subramaniam Versus Rajesh Raghuvandra Rao

The SC declared sub-section 2A of Section 69 of the Indian Partnership Act, 1932, introduced by the Maharashtra Amendment Act of 1984, unconstitutional ... Interpretation of the statute - dissolution of an unregistered partnership firm - suit not maintainable in view of sub-section (2A) of Section 69 of the Indian Partnership Act, 1932 (`the Act') - Whether sub-section 2A of Section 69 inserted by the Maharashtra Amendment violates Articles 14, 19(1)(g) and 300A - Bombay City Civil Court by order dated 16.8.1999 made a reference to the High Court u/s 113 of C.P.C. The High Court held that the said sub-section 2A of Section 69 of the Act is not unconstitutional. HELD THAT:- Article 300A of the Constitution of India states :- 'No person shall be deprived of his property save by authority of law.' It is by now well settled that a law to be valid has to be non arbitrary vide the 7-Judge Bench decision of this Court in Maneka Gandhi vs. Union of India and another [1978 (1) TMI 161 - SUPREME COURT] Sub-section 2A virtually deprives a partner of a firm from his share in the property of the firm without any compensation. Also, it prohibits him from seeking dissolution of the firm although he may want it dissolved. Article 14 guarantees the right to equality and states that 'The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.' Equal protection means the right to equal treatment in similar circumstances. In other words there can be classification for legitimate purposes, but it is well settled that the classification must be reasonable i.e. based on intelligible differentia and having nexus between the basis for classification and the object of the legislation. Under Article 19(1)(g) of the Constitution all persons have the right to practice any profession or to carry on any occupation, trade or business. Clause (6) of that Article enables the State to make any law imposing, in the interest of general public, reasonable restrictions on the exercise of the right conferred under sub-clause (g) of Article 19(1). 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.[1964 (4) TMI 109 - SUPREME COURT]. Therefore, the restrictions placed by sub-section 2A of Section 69 introduced by the Maharshtra 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. 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. 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. Consequently this appeal is allowed and impugned judgment of the Bombay High Court is set aside. The suit can now proceed ignoring sub-section 2A which we have declared invalid. No costs. Issues Involved:1. Constitutionality of sub-section 2A of Section 69 of the Indian Partnership Act, 1932, as introduced by the Maharashtra Amendment Act of 1984.2. Violation of Articles 14, 19(1)(g), and 300A of the Constitution of India by sub-section 2A of Section 69.Issue-wise Detailed Analysis:1. Constitutionality of sub-section 2A of Section 69 of the Indian Partnership Act, 1932, as introduced by the Maharashtra Amendment Act of 1984:The appeal arose from a suit filed for the dissolution of an unregistered partnership firm. The defense argued that the suit was not maintainable under sub-section 2A of Section 69 of the Indian Partnership Act, 1932, introduced by the Maharashtra Amendment Act of 1984. The Bombay City Civil Court initially found this sub-section unconstitutional, but the Bombay High Court upheld its constitutionality. The Supreme Court, however, found that sub-section 2A violates Articles 14, 19(1)(g), and 300A of the Constitution of India.2. Violation of Articles 14, 19(1)(g), and 300A of the Constitution of India by sub-section 2A of Section 69:- Article 14 (Right to Equality):The Supreme Court observed that sub-section 2A of Section 69 is arbitrary and does not provide equal protection under the law. The classification must be reasonable and have a nexus with the object of the legislation. The Court found that sub-section 2A fails this test as it does not protect third-party members of the public and imposes unreasonable restrictions on partners of unregistered firms.- Article 19(1)(g) (Right to Practice Any Profession, Occupation, Trade, or Business):The Court held that the restrictions imposed by sub-section 2A are excessive and arbitrary, thus violating Article 19(1)(g). It cited previous judgments to emphasize that any restriction must be reasonable and not go beyond what is required in the public interest. The Court found that sub-section 2A excessively restricts partners from dissolving the firm or recovering their share in the firm's property, making it unreasonable.- Article 300A (Right to Property):The Court noted that sub-section 2A virtually deprives a partner of his property without compensation, violating Article 300A. The Court cited various precedents to illustrate different forms of deprivation of property and concluded that sub-section 2A constitutes an arbitrary deprivation of property.Conclusion:The Supreme Court declared sub-section 2A of Section 69, as introduced by the Maharashtra Amendment Act of 1984, unconstitutional for violating Articles 14, 19(1)(g), and 300A of the Constitution. The appeal was allowed, and the impugned judgment of the Bombay High Court was set aside. Consequently, the suit for the dissolution of the unregistered partnership firm can proceed, ignoring sub-section 2A.