Supreme Court Allows Suit by Unregistered Firm, Sets Aside Gujarat High Court Order

The case of Shiv Developers vs. Aksharay Developers & Others is a crucial ruling by the Supreme Court regarding the applicability of Section 69(2) of the Indian Partnership Act, 1932, to suits filed by unregistered partnership firms. The Court held that a suit by an unregistered firm seeking relief against fraud and misrepresentation was not barred under Section 69(2), thereby setting aside the Gujarat High Court’s ruling that had rejected the firm’s plaint.

Background of the Case

The dispute arose when Shiv Developers, an unregistered partnership firm engaged in construction, challenged a sale transaction in court. The firm alleged that two of its business associates, who were initially partners in a joint venture, clandestinely registered a new partnership firm under the same name, ‘Aksharay Developers,’ without informing Shiv Developers.

The key events in the case were:

On November 26, 2013, Shiv Developers and two individuals (Dineshbhai Patel and Arjunsinh Rajput) purchased a piece of land in Vadodara with a 60% ownership stake in favor of Shiv Developers.
On April 22, 2014, a new partnership firm, ‘Aksharay Developers,’ was formed with four partners, including a partner from Shiv Developers, to develop a project on the purchased land.
On February 23, 2015, two partners of Aksharay Developers (Dineshbhai Patel and Arjunsinh Rajput) registered another firm with the same name and excluded Shiv Developers’ partner.
On February 24, 2015, the new firm executed a sale deed, transferring the 60% share of Shiv Developers to itself, allegedly without informing Shiv Developers.
The cheques issued as payment for the sale were dishonored.

Shiv Developers filed a suit in the Vadodara Trial Court, seeking to declare the sale deed as null and void due to fraud and misrepresentation.

Legal Issues Raised

Whether the suit filed by Shiv Developers, an unregistered firm, was barred under Section 69(2) of the Indian Partnership Act, 1932.
Whether the case involved the enforcement of a contractual right or the assertion of a statutory/common law right.
Whether the fraudulent execution of the sale deed justified judicial intervention, irrespective of the firm’s registration status.

Arguments of the Petitioner (Shiv Developers)

Shiv Developers, through legal counsel, presented the following arguments:

Fraud and Misrepresentation: The suit was not for enforcing a contractual right but for avoiding a fraudulent sale deed.
Non-Applicability of Section 69(2): The bar under Section 69(2) applies only to suits enforcing a contractual right and not to suits based on fraud.
Common Law Rights: The firm was seeking relief based on property ownership rights, which are independent of contractual rights.
Payment Default: The firm had not received sale consideration, making the transaction legally void.

Arguments of the Respondents (Aksharay Developers & Others)

The respondents opposed the suit, arguing:

Suit Barred by Law: Since Shiv Developers was an unregistered firm, it could not file a suit based on contract under Section 69(2).
Validity of Sale Deed: The sale was executed through a legally binding agreement, and ownership had been transferred.
Trial Court Overstepped Jurisdiction: The respondents contended that the Trial Court should have dismissed the suit at the outset based on statutory limitations.

Trial Court and High Court Decisions

The Vadodara Trial Court ruled in favor of Shiv Developers, holding that Section 69(2) did not bar the suit since it involved claims of fraud and misrepresentation rather than enforcement of contractual rights.

The Gujarat High Court, however, overturned this decision and dismissed the suit, reasoning that the claim was rooted in a contract and therefore barred under Section 69(2).

Supreme Court’s Observations

The Supreme Court, comprising Justices Dinesh Maheshwari and Vikram Nath, made the following key observations:

Distinction Between Contractual and Statutory Rights: The Court held that a suit challenging fraud is not barred by Section 69(2) as it does not arise from a contract.
Fraud Nullifies Transactions: A fraudulent sale deed cannot be upheld merely because it was executed through a formal agreement.
Applicability of Section 69(2): The bar applies only when a firm sues to enforce a contract related to its business, not when seeking redress for fraud.
Restoration of Trial Court Order: The Court ruled that the Trial Court was correct in allowing the suit to proceed.

Final Judgment

The Supreme Court allowed the appeal and set aside the Gujarat High Court’s order, restoring the Trial Court’s ruling. The judgment stated:

“The impugned judgment and order dated 15.02.2018, as passed by the High Court of Gujarat, is set aside. The order dated 07.04.2017 as passed by the 9th Additional Senior Civil Judge, Vadodara, is restored. The Trial Court shall now proceed with the trial of the suit in accordance with law.”

Implications of the Judgment

This ruling has several important implications:

Strengthening Protection Against Fraud: The judgment clarifies that fraud cannot be shielded by procedural technicalities.
Clarification on Section 69(2): The decision establishes that unregistered firms can file suits for fraud and misrepresentation.
Upholding Property Rights: The ruling reinforces that wrongful deprivation of property cannot be justified by legal loopholes.
Judicial Support for Fair Business Practices: The Supreme Court emphasized that courts must prioritize justice over procedural technicalities.

Conclusion

The Supreme Court’s decision in Shiv Developers vs. Aksharay Developers & Others ensures that legal technicalities do not override substantive justice. By setting aside the Gujarat High Court’s ruling, the Court reaffirmed the right of aggrieved parties to seek redress against fraud and misrepresentation. This case sets an important precedent for similar disputes involving property transactions and partnership firms.

Petitioner Name: Shiv Developers.
Respondent Name: Aksharay Developers & Others.
Judgment By: Justice Dinesh Maheshwari, Justice Vikram Nath.
Place Of Incident: Vadodara, Gujarat.
Judgment Date: 31-01-2022.

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