The main disabilities that are suffered by an unregistered firm are listed below:
1. No suit in a civil court by a partner against the firm or other copartners :
ADVERTISEMENTS:
If any dispute arises among the partners or between a partner and the firm or between a partner and ex-partners, and the dispute is based upon the rights arising from contract (i.e., partnership deed) or upon the rights conferred by the Partnership Act, then a partner of an unregistered firm cannot institute a suit to settle such disputes.
However, criminal proceedings can be brought by one partner against the other(s). Thus, if a partner steals the property of the firm or puts fire to the buildings of the firm, any partner can prosecute him for the same.
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2. No suit in a civil court by firm against third parties:
An unregistered firm cannot file a suit against a third party, if it so becomes necessary, to enforce any right arising from contract, e.g., for the recovery of the price of goods supplied. Of course, criminal proceedings can be brought against the wrong doers. Thus a suit can be filed against a person who causes damage to the goods of the firm.
ADVERTISEMENTS:
Similarly, an unregistered firm can sue the drawer of a cheque dishonoured for insufficiency of funds which is a criminal offence under Section 138 of the Negotiable Instruments Act, 1881. It may be noted that a suit by a third party against the firm or its partners is not prohibited, it is only a suit by the firm, and that too arising out of a contract, against a third party which is prohibited.
3. The firm or its partners cannot make a claim of set-off or other proceeding based upon a contract:
The above two disabilities also apply to a claim of set-off or Gther proceeding to enforce a right arising from a contract. Thus, if a third party sues the firm to recover a sum of money, the firm cannot claim a set-off, i.e., the firm cannot say that the third party also owes some money to the firm and the same should be adjusted against the claim in question.
Similarly, if an unregistered firm institutes a suit for the reduction of rent against its landlord, such a suit is not maintainable because the suit falls under the disability relating to “other proceeding” to enforce a right arising from a contract (Gappulal Gordhandas vs Chunilal Shyamlal).