Indian Partnership Act – Consequences of Non-Registration of a Partnership Firm

Introduction

While the Company Act of 2013 requires registration, the Partnership Act of 2013 does not require it. Even if a Partnership Firm decides not to register, it is still legitimate under the law. This article will outline information on the consequences of Non Registration of a Partnership Firm, the liability of an unregistered Partnership Firm, and information on Section 69 of the Partnership Act.

Non-registration of Partnership Firm occurs when a business does not follow the procedures for becoming incorporated. A registered Partnership Firm, on the other hand, appears more credible to customers and third parties.

Indian Partnership Act

The Partnership Act of 1932 defines partnership as a relationship between two or more people who agree to share the profits made while operating a business, and the people who have entered the partnership are known as partners, and they are referred to as a “firm” while they are all together.

Benefits of a Partnership Firm

• Ease at making Decision 

Any organization’s decision-making process is crucial. Because there is no concept of resolutions in a partnership firm, decision-making could be speedier. A partnership firm’s partners have extensive powers and, in most situations, can conduct any transaction on behalf of the firm without the agreement of the other partners.

• Ownership instils a sense of responsibility

The activities of each partner’s firm are owned and managed by them. Although their tasks may differ, workers in a Partnership Firm are united for a similar goal. Ownership instils a sense of responsibility in employees, allowing them to work more diligently.

• Simple to Begin

One of the simplest types of businesses to start is a partnership. In most circumstances, a partnership deed is the only prerequisite for forming a partnership firm. As a result, a partnership can be formed the same day. An LLP registration, on the other hand, would take roughly 5 to 10 working days because the MCA requires digital signatures, DIN, Name Approval, and Incorporation.

• Funding Sources

A partnership firm, as opposed to a sole proprietorship, can easily raise cash. A larger number of partners allows for more feasible contributions from all of the partners. Furthermore, banks look more favorably on a partnership than on a sole proprietorship when it comes to credit approval.

What are the Consequences of Non-Registration of a Partnership Firm?

The following are the points in Section 69 of the Partnership Act that pertain to the effect of a Non Registration of a Partnership Firm:

• Partners Cannot Sue Another Partner

In an unregistered partnership firm, a partner cannot sue a co-partner. In the case of unregistered partnership firms, any breach of contract or conflicts of interest cannot be resolved by the law. The partners in an unregistered Partnership Firm are unable to assert their rights.

• Cannot Make a Set-Off Claim Against Third Parties

Section 69(3) of the Partnership Act of 1932 explains the principle of set-off claims. In a set-off claim, the debtor makes adjustments and can assert reciprocal rights against the creditor in mutual debts. This approach, however, cannot be applied when a Partnership Firm is not registered.

• Conversion To Another Entity Becomes Impossible

A registered Partnership Firm can choose to be converted to another corporate entity, such as an LLP (Limited Liability Partnership). Unregistered partnership firms are not eligible for this benefit.

• Third Parties are not barred from bringing a lawsuit against an unregistered partnership firm

The Act does not restrict an unregistered partnership business from suing a third party, but it does not prevent the opposite. As a result, a third party may still initiate a lawsuit against the unregistered partnership firm. The fact that the firm lacks the legal power to sue does not make it immune to legal action brought by other parties.

• Cannot File a Lawsuit Against a Co-Partner or a Third Party

Every firm will experience difficulties at some point. There could be arguments or conflicts between the partners, or there could be concerns such as a contract breach brought on by other parties. Unfortunately, a Partnership Firm that has failed to register will be unable to obtain legal assistance in this situation. In such cases, the firm’s power to sue a third party or a co-partner is forfeited. In such a case, neither the partners nor anyone else can act on behalf of the firm.

Conclusion

Although an unregistered Partnership Firm is indeed lawful in the eyes of the law and can continue doing business as usual, the disadvantages it brings with it are far greater. A business cannot operate in an ideal environment for long, and conflicts will arise, forcing the firm and its partners to respond with legal proceedings that would be unavailable without the firm’s registration. As a result, the partners must make an informed decision and register their Partnership Firm ahead of time.