Effects of a Non-Registred Partnership Firm in India
What are the effects of a Non-Registred Partnership Firm in India?
According to the Partnership Act of 1932, a partnership is a relationship between two or more people who decide to share profits while carrying on a business. Those who enter into a partnership in this way are called partners, and collectively they are called partnership firms.
Although registration is required under the Company Act of 2013, the Partnership Act does not need partnership entities to register. Even if a business chooses not to register, it would still be able to operate legally.
In the case of companies, registration is seen as establishing the existence of the company. As previously indicated, partnership firms do not operate similarly. When a business chooses not to incorporate, it is said to be a non-registered Partnership Firm. However, customers and outside parties view a registered partnership firm as more credible.
Advantages of a Partnership Firm:
A partnership firm has many advantages over a company or proprietorship firm.
- It is easier to kick-start a partnership as it has the tiniest requirements. A partnership deed registration would suffice in most cases.
- The decision-making procedure gets complex in companies concerning the board of directors and passing resolutions. All these are not required in a partnership firm.
- Raising funds is comparatively more straightforward in the case of partnership firms as compared to Companies. Having numerous partners causes it more work to collate the funds for the business.
- Partnerships are favored in banks to offer credit facilities as they are competent in raising capital and appear more long-lasting than proprietorship firms.
- The partners in the firm have a common objective and work with the same intent. A sense of shared ownership guarantees greater credibility and higher chances of running a victorious business.
Registration of Partnership Firm:
A partnership firm can be registered quickly with the Registrar of Firms by having the following elements.
- The name of the firm
- The Place where the principal business will be carried out.
- Additional Place of business (If any)
- Details of Partners.
- The date on which the business will be started.
- The period during which the partnership has been supported.
- Partnership deed with the signatures of the partners affixed adequately.
The prescribed application must be presented to the Registrar of Partnership along with the above-stated information and the prescribed fee.
Consequences of Not Registering a Partnership Firm:
Although the Partnership Act, 1932, does not make the registration of a partnership mandatory: https://www.mca.gov.in/MinistryV2/incorporation.html, the fact that it suggests the registration of partnership firm should make one consider the ifs and buts of failing to do so. The Act subtly puts compelling pressure to register the partnership firms. Section 69 of the Act lists a few drawbacks of not registering the firm. This section elaborates on the downsides of not having the firm registered. Perhaps the statute intended to make it passively compulsive to register partnership firms.
Cannot File a Suit Against a Co-Partner or a Third Party:
A business is bound to face challenges at some moment in time. There might be disputes or conflicts arising between the partners or issues such as violating the contract created by third parties. In such scenarios, the firm loses its right to sue a third party or a co-partner. Neither the partners nor any person can act on behalf of the firm at such an instance. In the case of Jagat Mittar Saigal vs. Kailash Chander Saigal, it was held that to sue, the firm or the partner in question must have their name registered with the Registrar of Firms. Unfortunately, a partnership firm that has skipped registration cannot avail of any legal support in this case. However, the partners can resolve the dispute through arbitral proceedings, as held in Umesh Goel v. Himachal Pradesh Co-operative Housing Society Ltd in 2016.
Cannot Avail Set-Off Claim Against Third Parties:
The principle of set-off claims is explained in section 69(3) of the Partnership Act 1932. In a set-off claim, the debtor makes adjustments and can put common shares in the mutual debts with the creditor. However, this principle cannot be put into practice when a partnership firm is not registered.
Third Parties Cannot be Estopped from Suing the Unregistered Partnership Firm:
Although an unregistered partnership firm cannot sue a third party, the Act cannot prevent the converse. Thus, A third party can still file a case against the unregistered partnership firm. Merely because the firm does not have the right to sue does not render it immune to legal suits filed by other parties.
Partners Cannot Take Action Against Another Partner:
The law cannot address any breach of contract or conflicts of interest in the case of unregistered partnership firms. In an unregistered partnership firm, a partner cannot take any legal action against a co-partner. In an unregistered partnership firm, the partners cannot enforce their rights.
Conversion To Another Entity Becomes Impossible:
A registered partnership firm has the option of getting itself converted to any other corporate entity like that of an LLP. This privilege is not available to unregistered partnership firms.
The main reason why many firms choose a partnership firm is that it is easy to set up and does not require registration. However, partners will pay a heavy price if they ignore it and do nothing about it. Unregistered partnership firms are nevertheless valid in the eyes of the law and can still conduct business as usual, but they come with far more drawbacks than positives. A company cannot operate in an ideal environment for a long time as it is prone to conflicts. To resolve these conflicts, the firm and its partners would need to take legal action, which they would be unable to do without the firm’s registration. Consequently, partners should be careful while choosing and registering their partnership firm early.
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