MP High Court Restores Suit, Says Bar On Unregistered Partnerships Not Applicable As Claim Not Made As Partner

The Madhya Pradesh High Court at Jabalpur has set aside a trial court order rejecting a suit at the threshold, holding that the bar on suits by unregistered firms could not be invoked where the plaintiff was seeking declaration of his rights in the land on the basis of the money he had invested.

A single judge bench of Justice Deepak Khot observed, "In fact, it is a case of the appellant that the appellant has invested money with defendants, who are said to be partners in the partnership firm to purchase land. However, the defendant became the office bearer of the society from which it is to be purchased, therefore, it is not a case of the firm against the third party. It is the case of the appellant/plaintiff for declaration of his rights in the land. However, the relief which has been sought by the appellant is ex-facie not tenable in the eyes of law in absence of any transfer in favour of the appellant and other persons who have invested with the appellant to purchase the land as there is no transfer deed available on record."

The court explained that Section 69(2) of the Indian Partnership Act bars an unregistered partnership firm from filing a suit to enforce a contractual right against a third party. The provision is intended to ensure that such firms cannot enforce business contracts in court and to protect those dealing with them. However, the bar applies only where such contractual rights are sought to be enforced and not in a case like the present one.

The case arose from a dispute over land where the appellant, Deen Mohammad, sought a declaration that he was a co-owner of the property and a permanent injunction restraining the defendants from creating third-party interest or alienating the land.

According to the plaint, he had invested money along with others, including one of the defendants, to purchase land from the main defendant, a co-operative society, under an agreement dated May 5, 2016. This was followed by a partnership deed executed on July 18, 2016. He alleged that despite payment of consideration, the defendants, including those who later became office bearers of the society, were attempting to sell the property in parts

The defendants opposed the suit at the outset, contending that the plaintiff was not a party to the agreement and that the claim arose out of an unregistered partnership, attracting the bar under Section 69(2). They also argued that in the absence of a registered sale deed, the plaintiff could not claim ownership and could at best seek specific performance, refund, or damages.

The appellant, on the other hand, maintained that he was not suing as a partner to enforce a contract but was asserting his own rights in the property based on his investment and that the issue could not be decided without evidence.

The High Court found that the trial court had rejected the plaint solely on this ground without examining other aspects. It held, “When pleadings of the plaint have been examined, it is found that the plaintiff is not claiming any rights arising out of a contract with a third party being the partner of the firm nor it is a case that a partnership firm has entered into a contract with a third party in which the appellant being a partner having rights.”

The court also noted that the trial court had not examined whether there was a cause of action or whether the plaintiff had any rights capable of declaration.

At the same time, the bench observed that the relief claimed may not be tenable in the absence of a registered transfer. It stated, “However, the relief which has been sought by the appellant is ex-facie not tenable in the eyes of law in absence of any transfer in favour of the appellant and other persons who have invested with the appellant to purchase the land as there is no transfer deed available on record.”

It further explained, “The object behind section 69(2) of the Act is that a third party should not be defrauded by a firm which is not registered, against whom no contractual obligation can be enforced.”

Holding that the rejection of the plaint was not in accordance with law, the High Court quashed the trial court's order and remanded the matter for fresh consideration after hearing all parties

For Appellant: Advocates Avinash Zargar with Kedar Prasad Kuswaha and Gouransh Bhurrak and Arvind Soni

For Respondent 1: Advocate Ashok Kumar Gupta

For Respondents 2, 4, and 5: Advocates Anshuman Singh, with Shri Anuj Shrivastava

For Respondent 3: Advocate Fuzail Usmani