In the recent judgment given (in the case of Umesh Goel v. Himachal Pradesh Co-operative Housing Society Ltd. on June 29, 2016), the Honorable Supreme Court of India held that the ban imposed under section 69 of the Indian Partnership Act (“Act”), – (i) on a partner of an unregistered firm to institute a suit against the firm or any of its partners and (ii) on the firm to institute a suit against a third party, does not apply to arbitral proceedings. By the aforesaid judgment, the Honorable Supreme Court has set aside the decision of the Division Bench of the Delhi High Court in the aforesaid matter.
Background As per provisions of section 69 (1) of the Act, if a partnership firm is not registered, then, a partner(s) of the said firm cannot sue the firm, or any partner(s) of the said firm. As per provisions of section 69 (2), the said firm cannot sue a third party. An interesting and a very important legal question arose for consideration for the Honorable Supreme Court relating to interpretation of provisions of Section 69(3) of the Act with reference to its applicability to Arbitral proceedings. The relevant portion of section 69 (3) of the Act reads as under,-
Quote “The provisions of sub- sections (1) and (2) shall apply also to a claim of set- off or other proceeding to enforce a right arising from a contract,-… (a)… (b)… partner“
Unquote
In background of the aforesaid provisions, a question which arose for consideration was whether Section 69(3) is attracted to the Arbitral Proceedings and the ultimate award passed therein by construing the same as falling under the expression “other proceedings” mentioned under section 69 (3) of the Act? In other words, in case of an unregistered partnership firm, can a partner opt for arbitration against another partner or the firm and can the firm opt for arbitration against a third party? In the case mentioned above, while the Arbitral Tribunal and the single judge of the Honorable Delhi High Court were of the opinion that the aforesaid provisions of the Act did not apply to the Arbitral proceedings, the Division bench of the said Court took a contrary view.
Honorable Supreme Court’s Judgment
Arbitral Proceedings will not come under the expression “other proceedings” of Section 69(3) of the Partnership Act and the ban imposed under the said Section 69 (as elucidated above) does not have application to Arbitral proceedings and Arbitration Award.
Court’s Reasoning (in brief)
Based on the close analysis of Section 69 in its different parts, in order to attract the said section, first and foremost, the pending proceeding must be a suit instituted in a Court and in that suit a claim of set off or other proceedings will also be barred by virtue of the provisions of Sub-section (3) of the said Section. Having regard to the manner in which the expressions are couched in Sub-section (3), a claim of set off or other proceedings cannot have independent existence. In other words, the foundation for the application of the said Sub-section should be the initiation of a suit in which a claim of set off or other proceedings which intrinsically connected with the suit arise and not otherwise.
In response to the counsel’s submissions that under the Limitation Act, the Arbitration Proceedings were to be treated on par with civil proceedings, the Court held that a reading of Section 69 as a whole, did not permit of any interpretation that would cover Arbitral proceedings, de hors, filing of a suit in a Court. Therefore, any interpretation made under the Limitation Act while construing Section 14 to treat Arbitral proceedings on par with civil proceedings cannot be applied to the case on hand.
In response to the counsel’s submissions that under section 36 of the Arbitration and Conciliation Act, 1996, an award of the Arbitral Tribunal was equated to decree of the Court for the purpose of execution and that the award can be enforced under the Code of Civil Procedure in the same manner as if it were a decree of the Court, the Supreme Court held that it was difficult to draw an inference that based on the deeming provision specifically meant for the enforcement and execution of an Arbitral Award, the Arbitral Proceedings could be equated to a Civil Court proceeding. Section 36 of the Arbitration Act referred above only created a statutory fiction which was limited for the purpose of enforcement of the Award. The deeming fiction was specifically restricted to treat the Award as a decree of a Court, exclusively for the purpose of execution. Therefore, it could not be held that the entire Arbitral proceeding is a Civil Court proceedings for the purpose of applicability of Section 69(3) of the Partnership Act.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.