Find out the legal and social consequences of not registering your partnership. It will save your personal assets and protect you against criminal actions.
Your partnership business will have no rights if it doesn’t exist in government records.
How can you say that someone owns a business when it legally doesn’t exist?
Table of contents
- Need for Registration
- Your business can’t sue any other business organization or a third-party
- Is the third-party totally immune to suits by unregistered businesses?
- Aggrieved partner cannot sue other partners if your partnership is not registered
- Liability of the members
- Can you register a firm after commencement of business
Need for Registration
There is a need for registration to all these startups and businesses. It’s not like that without the registration the company or firm cannot work or carry out its business, it’s just that it should not affect the personal liabilities of the members or partners.
Also, there exists certain tax liabilities that require you to register your business.
Given below are the consequences of not registering your partnership as a Firm under the Partnership Act, 1932.
Your business (which is not registered) cannot sue any other registered, unregistered business or natural persons, simply because your company doesn’t exist. Instead, you can be sued personally by both natural and juristic persons. They can sue you for criminal offences like cheating and criminal breach of trust etc.
Suits between a firm and third-party in Section 69(2) of the Indian Partnerships Act, 1932 (hereinafter referred to as “Partnership Act”) states that in contractual matters, the firm cannot sue any third-party for enforcement of rights arising from the contracts.
However, the individuals of the non registered business can be sued individually for their own individual actions. Let’s understand this with an example – in case Jagdish Chandra Gupta vs. Kajaria Traders Ltd. the court held that no suit by or on behalf of the firm against the third party shall be initiated unless the firm is registered and the person suing is or has been shown in the register of the firms as a partner of the firm. From the above case, we can also assume that if the partner is not shown in the Register Of Firms as a partner of a firm then he is unable to file a suit against a third- party.
Are third parties immune to suits by unregistered businesses?
An unregistered firm cannot sue a third-party in any matter arising out of any contract between the unregistered firm and the third-party.
If a third-party commits an act or omission to harm any partner, property, or reputation of an unregistered firm then the unregistered firm cannot sue the third-party.
However, the third-party can be sued for any kind of personal harm caused to the partner or partners of the unregistered firm. The third-party can be liable for various criminal offences if they cause harm with intention or negligence.
A partner of the firm cannot bring any legal action against the firm or any other partner of the firm or, alleged to be the partner of the firm if the firm is not registered.
This was also upheld in the case of Jalal Mohammed Ibrahim vs. Kakka Mohammed Ghouse Saheb. The suit by one of the two partners of an unregistered firm against the other partner is hit by Section 69(1) of the Partnership Act, but the suit on an independent agreement between the partners is maintainable.
You can never be sure about your loss sharing in a partnership if you don’t register it.
If the registration of the business exists; all the partners will be liable in the ratio of the profit and loss and if not registered all will be liable in equal proportion. Refer to Section 13(b) of the Partnership Act.
Can you register a firm after commencement of business
Here comes the concept of subsequent registration. It means that if the suit is instituted in the court and the registration of the firm is done after the institution of the suit then the suit is invalid in the eyes of law. The words in Section 69(2) of Partnership Act are mandatory and the suit instituted without registration of the firm is void and cannot be proceeded with.
In the case of Dwijendra Nath Singh vs. Govinda Chandra, it was held by the Calcutta High Court that the later registration of the firm before the suit was actually heard, cannot validate the institution of the suit and the suit must fail if the firm was not registered on the date of institution of the suit.
In the case of Delhi Development Authority vs. Kochhar Construction Work, an unregistered firm filed a proceeding before the High Court of Delhi under Section 20 of the Arbitration Act, 1940 (this act has been repealed, we now have Arbitration and Conciliation Act, 1996). It was held that the proceedings were ab initio defective as that could not have been instituted, as the firm in whose name the proceedings were instituted was not registered at the time of institution proceedings.
NOTE: Just signing a deed/agreement within the partners is not registration. It won’t be called a registered firm even if you get it notarized. You need to get it registered with the Registrar of Firms of your State.
It is very important to register your partnership before you start transacting.
Registration of partnership is only advantageous because it will not only protect your personal assets but also protect you from criminal charges.
And like the icing on the cake, they will assure you of your profit and loss share.
There are many benefits of registering a partnership such as being a separate entity, you can own a property in the firm’s name, you can borrow funds with more ease and much more.
Edited by Siddhant Pandey