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Laws & Legal Procedure for Unregistered Partnership Firms to File for Voluntary Winding-Up: Lawyers Advice

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Laws & Legal Procedure for Unregistered Partnership Firms to File for Voluntary Winding-Up: Lawyers Advice

Unlike English Law where registration of partnerships firms is compulsory and a penalty is imposed upon registration, the Indian Partnership Act, 1932 doesn’t make registration compulsory. However, the legal effects of registration and non-registration vary. This article seeks to examine the legal procedure for unregistered partnerships firms to file for voluntary insolvency under the IBC.
Before elaborating on the procedures and options available to unregistered partnership firms, it is crucial to analyse the governing statues and the respective sections for a better understanding. They are as follows –

  1. The Companies Act, 2013 Sections 375-378 deal with winding up of unregistered companies.
    Section 375 of this Act deals with the “Winding up of unregistered companies”. The term “unregistered company” includes partnership firms as well, hence this section is applicable in this context.
    • As per Section 375(2), unregistered companies cannot be wound by under this Act voluntarily.
    • As per Section 375(3), an unregistered company can be wound up if (a) the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs; (b) the company is unable to pay its debts; (c) if the Tribunal is of opinion that it is just and equitable that the company should be wound up.
    Section 377 states that both the Tribunal and Liquidator can carry out and exercise any powers or do any act in case of unregistered companies, which they would do or exercise in case of companies formed and registered under the Act.
  2. The Indian Partnership Act, 1932 –
    Section 69 of the Act deals with the effect of non-registration of partnership firms, whereby partners cannot sue the firm, enforce a right arising from a contract or even sue third parties on behalf of the firm to enforce a right arising from a contract.

Judicial Pronouncements with respect to the effect of Non-Registration of a Partnership Firm are as follows –

In M/s NN Enterprises v. Relcon Infra Projects Limited (CP (IB) 3980/MB/C-IV/2018)
• Whereby the unregistered partnership firm (the “Operational Creditor”) filed a petition against the Corporate Debtor – the Corporate Debtor contended that since the firm is not registered, the petition could not be maintained under the IBC.
• The learned counsel contended that as per Section 3(23) of the IBC, “partnership firm” means only a registered firm and not an unregistered one.
• Ultimately, the NCLT rejected the petition stating “admitting the petition would be gross misuse of the IBC and process of law”. They also stated that the right of the petitioner to approach another judicial forum was not prejudiced.

In D.D.A. v. Kochhar Construction Work and Ors. 1998 (8) SCC 559, the court held that just because a proceeding has been filed in the court for its non-registration, the obligation to be registered as a company does not eradicate the initial defect as it may be a registered firm presently, but it was not one in the institution of the proceeding.

From a comprehensive reading of the Companies Act, 2013, along with the NCLT Rules, 2016, one can arrive at the conclusion, with respect to unregistered partnerships that it cannot be wound up voluntarily. Hence, it can only be wound up by the Tribunal. The legal procedure for the same is as follows –

  1. Once an order for winding up has been passed by the Tribunal as under Section 273(1)(d), then under Section 274 of The Act, the directors and other officers of the company have to submit the completed and audited books of accounts of the company within 30 days of such order being passed by the tribunal to the provisional liquidator.
  2. The provisional or company liquidator as appointed by the tribunal, as under Section 275 shall file a declaration within 7 days from the date of appointment about any conflict of interest or lack of independence in respect of his appointment.
  3. Within 3 weeks of such order of winding up, the company liquidator shall then make an application to the tribunal to constitute a Winding Up Committee to assist and monitor the process of liquidation.
  4. During this process, no other legal proceedings can take place against the company (Section 279). The tribunal has complete authority to either entertain or dispose such proceedings, suits, claims as well. (Section 280)
  5. As under Section 282, upon seeing the report submitted by the liquidator (containing all the particulars as prescribed under Section 281), the tribunal fixes a time within which the entire proceedings are to be completed and the company is to be dissolved.
  6. The company liquidator, under Section 283 of the Act, on the order of the tribunal, shall take into his custody and control all the property, effects or actionable claims to which the company is entitled. The powers and duties of the liquidator are also provided under Section 290 of the Act.
  7. Once the entire procedure as prescribed is completed and the company has been wound up, the liquidator can make an application for dissolution of the company as per Section 302 to the Tribunal.
  8. The tribunal shall make an order that the company be dissolved from the date of the order and the company shall be dissolved accordingly.

Hence, it can be concluded that the NCLT plays a vital role in the winding up of unregistered companies. Although there are effects of non-registration of partnership firms, the procedure for winding up has been dealt with effectively. Upon analysing the legal procedure for winding up, one can say that the guidelines as provided under Companies Act, 2013 are comprehensive, and the entire procedure has been made transparent and efficient
Authored By: Adv. Anant Sharma & Madhulika Iyer

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