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CASE NO.:

Appeal (civil) 4092 of 1998

PETITIONER:

Purushottam & Anr

RESPONDENT:

Shivraj Fine Art Litho Works & Ors

DATE OF JUDGMENT: 07/11/2006

BENCH:

B.P. Singh & Altamas Kabir

JUDGMENT:

J U D G M E N T

B.P. Singh, J

In this appeal by special leave the plaintiffs are the appellants.

Their suit against original defendant nos. 1 to 9 was decreed for the

sum of Rs.8,92,815.14 by the Third Joint Civil Judge (Senior

Division), Nagpur in Civil Suit No.52 of 1980. On appeal by original

defendants 1 to 3, the High Court in First Appeal No.35 of 1988 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 maintainable, the plaintiff being an

unregistered firm.

The facts of the case are not in dispute and they will be briefly

noticed. Plaintiff No.1, 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 defendant firm namely \026 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 1974, Special Civil Suit No.9

of 1974 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 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 \026 respondent No.1 herein as joint receivers.

The aforesaid Purushottam had business dealings with the

respondent No.1 \026 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.1, 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.1, Purushottam, herein for the

business of respondent No.1 \026 firm. A khata was maintained by

plaintiff No.1 \026 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 1979 a sum of Rs.6,22,713.06 was the balance due from

the defendant firm to plaintiff Purushottam. The plaintiff was also

entitled to interest at the agreed rate of 18% per annum on the balance

outstanding for more than seven days.

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With effect from January 1, 1980 the proprietary \026 firm of

Purushottam (Plaintiff No.1) was taken over by a partnership of which

plaintiff Purushottam was also a partner. The said partnership firm

took over all the assets and liabilities of "Dinesh Paper Mart" and

continued their business in the same name. Though the said

partnership firm came into existence on January 1, 1980, an

application for registration of the firm 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

Plaintiff No.2 \026 firm was granted registration under the Act. It would

thus appear that though the 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

firm was not maintainable to enforce a right arising from a contract.

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.1, the erstwhile proprietor

may be entitled to enforce his 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

firm 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 personal capacity as erstwhile proprietor of the concern.

Shri V.A. Mohta, Sr. Advocate, appearing on behalf of the

appellants 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 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.1, 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 not with the unregistered firm and for this he relied on the

judgment of this Court in Haldiram Bhujiawala and Anr. Vs. Anand

Kumar Deepak Kumar and Anr. : (2000) 3 SCC 250.

In M/s.Shreeram Finance Corporation Vs. Yasin Khan and

Ors. (1989) 3 SCC 476; it was held by this Court that a suit filed by

the existing partners 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 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.

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. Vs. 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 to the view that subsequent

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registration of the firm may cure the 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:-

"Counsel for the respondents, however, invited our

attention to two decisions which take a view that

subsequent registration of the firm can cure the initial

defect provided the registration is before the period of

limitation has run out. Our attention was drawn to

M.S.A. Subramania Mudaliar Vs. East Asiatic Co.

Ltd. and Atmuri Mahalakshmi Vs.Jagadeesh Traders.

However, the High Court of Patna in Laduram

Sagarmal Vs. Jamuna Prasad Chaudhuri and the

High Court of Madras in T. Savariraj Pillai Vs. 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 the 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 the firm cannot cure that

defect".

The same view was also reiterated in U.P. State Sugar Corporation

Ltd. Vs. Jain Construction Co. And Anr. (2004) 7 SCC 332.

These decisions squarely answer the first submission of Shri

V.A. Mohta. The submission must therefore be rejected.

The second submission urged on behalf of the appellants is also

squarely answered by a judgment of this Court reported in Addanki

Narayanappa and Anr. Vs. 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 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 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 of profits from 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."

The High Court has, therefore, rightly held that the partnership

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having come into existence of which Plaintiff No.1 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 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 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 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 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 Moolchand was a partner

was the duly registered 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 of Moolchand, was given ownership of the trademark rights

for West Bengal. Upon the death of Moolchand in 1985 his four sons

got themselves recorded as joint proprietors of the trademark. Three

of them 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 Calcutta for registration of the same trademark in their

name claiming to be full owners of the trademark, without disclosing

the dissolution deed of 16.11.1974. In these circumstances a suit was

filed by the partnership firm with three of the sons of Moolchand as

partners 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 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.1 partnership firm was 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 appealed to this Court by Special

Leave.

Two questions were framed which arose for consideration.

"(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?

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(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 property?"

The first question was answered relying upon the law laid down

by this Court in Raptakos Brett & Co. Ltd. Vs. Ganesh Property

(1998) 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 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).

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.

We shall assume in favour of the respondents that the

observations made and principles laid down are obiter and 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 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 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 against third

parties or against fellow partners. Paragraphs 18 and 19 of the Report

reads 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 no

partner whose name is on the register will be

permitted to deny that he is a partner \026 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.

19. \005\005On 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

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himself with the certain security of the other partners

and the chance of proving by other evidence, the

partnership of the new but unregistered partner. A

third 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 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 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 a third party

for enforcement of any right arising from a contract

with such a third party would be barred at its 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 the

Register of Firms as partners of the firm, on the date

of the suit.

(ii) Such unregistered firm 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 contract of the firm 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 firm with the

third party defendant. The contract by the unregistered firm referred

to in Section 69(2) must not only 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

firm 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 purpose Section 69(2) seeks to achieve and 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 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 unregistered firm

with a third party, the bar of Section 69(2) will not apply.

In the instant case the contract was entered into with the

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respondent firm by the erstwhile proprietor of the concern namely

Purushottam. The partnership firm came into existence later. The

amount claimed in the suit were 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 contribution to the

capital, all the assets and liabilities of his erstwhile proprietary

concern. Thus, though the partnership firm, which was unregistered,

became entitled to enforce the contractual obligation of the defendant

firm which it owed to Purushottam, the contract was not one entered

into by the unregistered firm with a third party, nor was it one entered

into by the unregistered firm in the 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 \026 appellants.

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 1980 dated 29.4.1987.