2025 (3) TMI 490 - HC - Indian Laws

Partnership firm discharged from Section 138 case when one partner compounds offense under NI Act

Delhi HC held that in Section 138 NI Act cases against partnership firms, compounding by one partner discharges entire firm liability. Court ruled that ... Dishonour of Cheque - whether in a case under Section 138 of N.I. Act, against the Partnership Firm, compounding by one partner would be in discharge of the entire liability of the Partnership Firm or it can be apportioned to the partners individually? - HELD THAT:- Section 142 of N.I. Act deals with ‘cognizance of offence’ and provides that the Complaint under Section 138 of NI Act in writing, can be made by the Payee or holder in due course. The Legislature in its wisdom, has used the word ‘Complaint’ and not ‘Suit’ in Section 142 of N.I. Act thereby indicating that the bar created for maintaining a Suit in Section 69 of the Partnership Act by or against an unregistered Firm, cannot be stretched and applied to maintain a criminal proceeding under Section 138 of N.I. Act. The Apex Court in B.S.I. Ltd. and Another vs. Gift Holdings Pvt. Ltd. and Another, [2000 (2) TMI 719 - SUPREME COURT], interpreted the word ‘Suit’ while deciding maintainability of a proceeding under Section 138 of NI Act in the context of ban imposed by the Sick Industrial Companies (Special Provisions) Act. It provides that no Suit for Recovery of Money or Enforcement of any security against the Industry, Company or Guarantee in respect of any loan or advance granted to the Industrial Company shall lie if in respect of the Industrial Company, an inquiry under Section 16 is pending or any scheme referred to under Section 17, is under preparation or consideration. The Court observed that the word ‘Suit’ envisaged in Section 22 (1) cannot be stretched to criminal prosecution as it is neither for recovery of money nor for enforcement of any security, etc. Section 138 of NI Act is a penal provision for commission of an offence which entails conviction and sentence on proof of the guilt in duly conducted criminal proceedings. Once the offence under Section 138 of NI Act is completed, the prosecution initiated is not for recovery of the amount covered by the Cheque, but for bringing the offender to penal liability. The Kerala High Court in Abdul Gafoor vs. Abdurahiman, [1999 (3) TMI 657 - KERALA HIGH COURT], held that Section 138 is not a Suit and the bar of Section 69 (2) of the Partnership Act would not operate in such cases. It was further observed that the effect of non-registration of a Partnership Firm, is applicable only to the cases involving civil rights and has no application to criminal cases. Whether a Partnership Firm is a legal entity, which can sue or be sued in its own name? - HELD THAT:- Section 141 of N.I. Act read with Explanation, makes it abundantly clear that when an offence is committed by a Company or a Firm, every member who is responsible and in charge of the affairs of the Company/Firm is guilty of the offence committed under Section 138 of NI Act - the Notice under Section 251 N.I. Act was framed on 18.04.2018 only against the two partners and not the Partnership Firm, which has not been challenged by either Party. It is settled that in the absence of Company being arraigned as an accused, the Directors cannot be held liable for the offence committed by a company - Since the Notice under S.251 Cr.P.C. has not been framed against the Partnership Firm, this itself is a sufficient ground for discharge of the Petitioner. Whether compounding of Offence by one Partner would result in complete discharge of the Liability of the Partnership Firm against all the Partners? - HELD THAT:- The Firm is not a legal entity; it is a collective or compendious name for all the partners. In other words, a Firm does not have any existence away from its partners, though by virtue of S.141 NI Act, it can be sued in its name. A Decree in favour of or against a Firm has the same effect as a Decree in favour of or against the partners. When the Firm incurs a liability, it can be assumed that all the partners were incurring that liability and so the partners remain liable jointly and severally for all the acts of the Firm. Therefore, the liability of the partners is joint and several. In Ashutosh vs State of Rajasthan & Ors., [2005 (8) TMI 725 - SUPREME COURT], it had been observed by the Apex Court that it is open to a creditor of the Firm to recover the debt from any one or more of the partners. Each partner shall be liable as if the debt of the Firm has been incurred on his personal liability - Therefore, when there is a compromise by one partner, it has to be for and on behalf of the Partnership Firm and there cannot be any partial settlement with one partner, as has been done in the present case. In the present case, both the partners, namely, Petitioner/Satish Kumar Pawa and the Respondent No. 4/Sant Lal Agarwal, were jointly and severally responsible for the liability incurred by the Partnership Firm, meaning thereby that each is liable for the entire liability individually as well as jointly. The partners may have agreed to be entitled to the share profit & loss in a particular ratio, but their legal liability towards the third person is joint and several and there can be no apportionment. Once the matter stands compromised for whatever the amount, the offence is compounded towards all the existing liabilities of the Partnership Firm; nothing survives in the Complaint which has to be necessarily disposed of as compromised against the second partner/Petitioner as well. Thus, Section 257 of Cr.P.C. do not come to the rescue of the Complainant/Respondent No. 2 in the case herein. Conclusion - The principle that compounding by one partner results in the discharge of the entire liability of the partnership firm and its partners, given the joint and several liability under Section 25 of the Partnership Act. The complaint under Section 138 of N.I. Act filed by the Respondent No. 2 is quashed/disposed of as compounded and the Petitioner/Satish Kumar Pawa is hereby, acquitted - petition allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:1. Whether the compounding of an offence under Section 138 of the Negotiable Instruments Act, 1881 by one partner of a partnership firm results in the discharge of the entire liability of the firm and its other partners.2. Whether a criminal complaint under Section 138 of the Negotiable Instruments Act is maintainable against an unregistered partnership firm.3. Whether the absence of a notice under Section 251 of the Code of Criminal Procedure against the partnership firm affects the liability of the partners under Section 138 of the Negotiable Instruments Act.ISSUE-WISE DETAILED ANALYSIS1. Compounding of Offence by One PartnerThe relevant legal framework involves Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of cheques, and Section 25 of the Partnership Act, 1932, which provides that every partner is jointly and severally liable for acts of the firm. The court examined whether the compounding by one partner discharges the entire liability of the firm.The court reasoned that the liability of the partners is joint and several, meaning each partner is liable for the entire debt. The court referred to the Mediated Settlement Agreement, where one partner, Sant Lal Agarwal, settled the matter by paying half of the cheque amount, and concluded that the settlement was towards the entire liability of the partnership firm. Thus, the compounding by one partner should result in the discharge of the entire liability.The court concluded that once the matter is settled, the offence is compounded for all existing liabilities of the partnership firm, and nothing remains in the complaint against the other partner.2. Maintainability of Complaint Against Unregistered Partnership FirmThe court considered whether a complaint under Section 138 of the Negotiable Instruments Act is maintainable against an unregistered partnership firm. Section 69 of the Partnership Act, which restricts suits by or against unregistered firms, was examined. The court noted that the restriction applies to civil suits and not to criminal proceedings.The court relied on precedents, including the Apex Court's interpretation that the term 'suit' does not encompass criminal liability. The court concluded that the complaint under Section 138 is maintainable against an unregistered partnership firm, as it is a criminal proceeding, not a civil suit.3. Absence of Notice Against Partnership FirmThe court analyzed the impact of not framing a notice under Section 251 of the Code of Criminal Procedure against the partnership firm. Section 141 of the Negotiable Instruments Act was considered, which holds every person in charge of the firm's affairs liable for offences committed by the firm.The court referred to the Supreme Court's decision in Aneeta Hada vs. Godfather Travels & Tours Pvt. Ltd., which established that for prosecution under Section 141, arraigning the company or firm as an accused is imperative. The absence of a notice against the firm was deemed a sufficient ground for discharging the petitioner.SIGNIFICANT HOLDINGSThe court held that:'The liability of Sh. Sant Lal was not limited to his 50% as has been erroneously assumed, but is towards the entire liability. Once this compounding has been accepted by the Complainant, the necessary implication shall be that it is for and on behalf of the Partnership Firm.'The court established the principle that compounding by one partner results in the discharge of the entire liability of the partnership firm and its partners, given the joint and several liability under Section 25 of the Partnership Act.The final determination was that the complaint against the petitioner was quashed, and the petitioner was acquitted, as the offence was compounded for the entire liability of the partnership firm.