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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.