2025 (7) TMI 918 - SC - Indian Laws

Partners can be prosecuted individually for cheque dishonour under Section 138 without naming partnership firm as accused

The SC held that partners of a partnership firm can be prosecuted individually for cheque dishonour under Section 138 without the firm being named as an ... Dishonour of Cheque - Dismissal of complain since Partnership Firm was not made a Party - partners of a partnership firm are liable to be prosecuted individually sans the partnership firm being arraigned as an accused - Difference between a partnership firm and a company - Separate Legal Personality - Perpetual Succession - HELD THAT:- On a conjoint reading of the various clauses of Section 141, what emerges is that the expression “company” has been used in an expansive way to include not just a company incorporated under the provisions of the Companies Act stricto sensu but also any body corporate such as a statutory company as well as other artificial juristic entity such as a partnership firm or other association of individuals. Hence, the expression “director” in sub-section (2) of Section 141 is not restricted to a director of an incorporated company or a statutory body, but also includes a partner of a firm. The expression “director” in sub-section (2) of Section 141 of the Act in relation to a firm means a partner, which is also a legislative device adopted by the Parliament knowing fully well and being conscious of the fact that a partnership firm, jurisprudentially speaking, does not stand on par with a director of a body corporate. Since the Parliament has used the expression “company” encompassing all types of juristic persons, it was necessary to give an expanded definition to the expression “director” in relation to a firm to mean a partner in the firm - the partners of the firm are liable for the dishonour of a cheque, even though the cheque may have been issued in the name of the firm and the offence is committed by the firm. Therefore, in law and in jurisprudence, when a partnership firm is proceeded against, in substance, the partners are liable and the said liability is joint and several and is not vicarious. This is unlike a company which is liable by itself and since it is an artificial juristic entity, the persons in charge of the affairs of the company or who conduct its business only become vicariously liable for the offence committed by the company. A partnership firm has no legal recognition in the absence of its partners. If a partnership firm is liable for the offence under Section 138 of the Act, it would imply that the liability would automatically extend to the partners of the partnership firm jointly and severally. This underlying distinction between a partnership firm and a company which is a body corporate has to be borne in mind while dealing with an offence committed by a company or a partnership firm, as the case may be, within the meaning of Section 138 read with Section 141 of the Act. To reiterate, in the case of a partnership firm, there is no concept of vicarious liability of the partners as such. The liability is joint and several because a partnership firm is the business of partners and one cannot proceed against only the firm without the partners being made liable. herefore, even in the absence of partnership firm being named as an accused, if the partners of the partnership firm are proceeded against, they being jointly and severally liable along with the partnership firm as well as inter-se the partners of the firm, the complaint is still maintainable. The accused in such a case would in substance be the partners of the partnership firm along with the firm itself. Since the liability is joint and several, even in the absence of a partnership firm being proceeded against by the complainant by issuance of legal notice as mandated under Section 138 of the Act or being made an accused specifically in a complaint filed under Section 200 of CrPC, (equivalent to Section 223 of the BNSS), such a complaint is maintainable. The High Court was not right in rejecting or dismissing the complaint for the reason that the partnership firm was not arraigned as an accused in the complaint or that notice had not been issued to it under Section 138 of the Act. In view of the discussion, the notice issued to the partners of the firm in the instant case shall be construed to be a notice issued to the partnership firm also viz., ‘Mouriya Coirs’. Permission is granted to arraign the partnership firm as an accused in the complaint. The impugned order of the High Court is set aside - Appeal allowed. The core legal questions considered in this judgment are:(i) Whether the High Court was correct in quashing the complaint on the ground that the partnership firm, in whose name the cheque was issued, was neither issued a statutory notice under Section 138 of the Negotiable Instruments Act, 1881 (the Act) nor arraigned as an accused in the complaint, which was filed only against the individual partners.(ii) The proper interpretation of the expressions 'company' and 'director' in the Explanation to Section 141 of the Act, particularly whether a partnership firm is to be treated as a 'company' for purposes of criminal liability under Section 138 read with Section 141, and the resulting implications on liability of partners individually and/or jointly.(iii) The consequences of the distinction between a partnership firm and a company as separate legal entities or otherwise, especially in the context of criminal liability for dishonour of cheques under the Act.Issue-wise detailed analysis:1. Maintainability of complaint without naming the partnership firm as accused or issuing notice to it under Section 138 of the ActLegal framework and precedents: Section 138 of the Act mandates issuance of a statutory notice to the drawer of the cheque demanding payment within 15 days of receipt of information of dishonour. Section 141 introduces vicarious liability in cases where the offender is a company, defining 'company' to include a 'firm or other association of individuals' by Explanation (a), and 'director' in relation to a firm as a 'partner' by Explanation (b). The High Court quashed the complaint on the ground that the partnership firm was not issued notice nor made an accused, thus non-compliance with Section 141 rendered the complaint non-maintainable.Precedents such as Aneeta Hada (2012) clarified that for companies (being separate juristic entities), prosecution must be against the company itself before vicarious liability of directors arises. Dilip Hariramani (2022) reiterated that vicarious liability arises only if the company or firm is prosecuted as principal offender. However, these cases concerned companies or situations where the firm was not made an accused or notice was not issued to the firm or partners.Court's interpretation and reasoning: The Court distinguished these precedents on facts, noting that in the present case, notice was issued to both partners, and the complaint was filed against the partners, not the firm. The Court emphasized that a partnership firm is not a separate juristic entity distinct from its partners, but rather a compendious term for the partners themselves. Therefore, the non-inclusion of the firm as an accused or non-issuance of notice to the firm does not go to the root of maintainability. The notice to partners is construed as notice to the firm. The Court granted permission to the complainant to implead the partnership firm as accused, but held that the complaint was maintainable against the partners even without naming the firm.Key evidence and findings: The cheque was drawn in the name of the partnership firm and signed by one partner. Notice was issued to both partners, but not to the firm. The complaint named only the partners as accused. The High Court quashed the complaint solely on this procedural defect.Application of law to facts: The Court applied the principle that a partnership firm has no separate legal existence apart from its partners. Since partners are jointly and severally liable, proceeding against them without naming the firm is not fatal. The statutory notice to partners suffices as notice to the firm. The Court found no prejudice or incurable defect in proceeding against partners alone.Treatment of competing arguments: The respondents argued that the firm is to be treated as a 'company' under Section 141 and thus must be prosecuted as principal offender before partners (directors) can be held liable. The Court rejected this by clarifying the distinction between a partnership firm and a company, noting that the legislative inclusion of firm within 'company' in Section 141 is a legal fiction for convenience and does not confer separate legal personality or vicarious liability akin to companies.Conclusion: The complaint is maintainable against partners even if the firm is not named as accused or issued notice. The High Court's order quashing the complaint on this ground is set aside.2. Interpretation of 'company' and 'director' in Section 141 of the Act and their application to partnership firms and partnersLegal framework and precedents: Section 141 imposes liability on companies committing offences under Section 138, and vicariously on persons in charge of the company's business. Explanation (a) defines 'company' to include a firm or other association of individuals; Explanation (b) defines 'director' in relation to a firm as a partner. Aneeta Hada emphasized that for companies, the company must be prosecuted first before vicarious liability of directors arises. Dilip Hariramani clarified that vicarious liability under Section 141 arises only when the company or firm commits the offence as principal offender.Court's interpretation and reasoning: The Court held that the inclusion of partnership firms within the definition of 'company' in Section 141 is a legislative device or legal fiction to facilitate prosecution and imposition of liability on partners. Unlike companies, partnership firms are not separate juristic entities but compendious terms for partners collectively. Therefore, partners are personally liable jointly and severally, not vicariously, for offences committed by the firm. The term 'director' in relation to a firm means 'partner' to extend liability to partners akin to directors of companies, but the nature of liability differs fundamentally.Key evidence and findings: The Court relied on statutory definitions in the Partnership Act, 1932, and the Negotiable Instruments Act, as well as authoritative commentaries and prior judgments distinguishing partnership firms from companies. The Court noted that while companies have separate legal personality and vicarious liability applies to directors, partnership firms lack separate legal personality and partners are directly liable.Application of law to facts: Since the cheque was issued in the name of the partnership firm and signed by a partner, the offence under Section 138 is committed by the firm through its partners. The partners are liable jointly and severally, not vicariously. The inclusion of firms in the definition of 'company' is for convenience and does not change the fundamental nature of partnership law.Treatment of competing arguments: The respondents' contention that the firm must be prosecuted as principal offender before partners can be held liable was rejected as inapplicable to partnership firms, given their lack of separate legal personality. The Court clarified that vicarious liability under Section 141 applies to companies as separate entities, not to partners of a firm who are the real persons liable.Conclusion: The partners of a partnership firm are personally, jointly and severally liable for offences under Section 138 of the Act committed by the firm. The legislative inclusion of firms within 'company' in Section 141 is a legal fiction for procedural convenience and does not confer vicarious liability as in companies.3. Distinction between a partnership firm and a company and its legal consequencesLegal framework and precedents: The Indian Partnership Act, 1932 defines partnership as a relation between persons carrying on business with a view to profit, acting for all. A firm is a compendious term for partners collectively. Companies under the Companies Act, 2013 are separate juristic entities with perpetual succession and limited liability. Landmark judgments such as Salomon vs. Salomon & Co. Ltd. establish the separate legal personality of companies. Indian Supreme Court decisions including Bacha F. Guzdar, Dulichand, and CIT vs. R.M. Chidambaram Pillai have consistently held that partnership firms are not separate legal entities but associations of individuals.Court's interpretation and reasoning: The Court extensively analyzed the fundamental differences between partnership firms and companies. A partnership firm lacks separate legal personality and perpetual succession; it is dissolved on change of partners. Partners have unlimited, joint and several liability for firm's obligations. Conversely, companies have separate legal personality, perpetual succession, and limited liability for shareholders. The Court emphasized that a firm's name is a compendious expression for the partners and does not confer separate legal existence.Key evidence and findings: The Court drew from statutory provisions, legal commentaries (Pollock & Mulla, Lindley), and judicial pronouncements to elucidate the nature of partnership and company. It noted that procedural relaxations allowing firms to sue or be sued in their firm name do not confer separate legal personality. The Court highlighted the unlimited liability of partners under Sections 25 and 26 of the Partnership Act.Application of law to facts: The Court applied these principles to the facts, underscoring that since the cheque was issued in the firm's name and signed by a partner, liability for dishonour lies jointly and severally on the partners. The firm itself cannot be treated as a separate offender distinct from its partners.Treatment of competing arguments: The respondents' attempt to analogize partnership firms to companies for purposes of criminal liability was rejected. The Court clarified that the legislative inclusion of firms under 'company' in Section 141 is a limited fiction for convenience and does not alter the fundamental legal distinction between firms and companies.Conclusion: Partnership firms are not separate juristic entities distinct from their partners. Partners are personally liable for the firm's obligations and offences. This distinction is critical in applying Sections 138 and 141 of the Act.4. Consequences of non-issuance of notice to the partnership firm and non-impleadment as accusedLegal framework and precedents: Section 138 requires issuance of statutory notice to the drawer of the cheque. The High Court held that non-issuance of notice to the firm and non-impleadment as accused vitiated the complaint. However, the Court noted that since the firm is not a separate legal entity, notice to partners suffices.Court's interpretation and reasoning: The Court held that notice issued to partners is deemed to be notice to the firm. Since partners are the real persons liable, failure to issue notice to the firm does not invalidate the complaint. The Court granted liberty to the complainant to implead the firm as accused if necessary, but refusal to proceed against the partners was unwarranted.Key evidence and findings: The statutory notice was issued to both partners, the cheque was in the firm's name, and the complaint named partners as accused. The High Court's quashing was based solely on procedural non-compliance regarding the firm.Application of law to facts: The Court applied the principle that a firm is a compendious term for partners and held that notice to partners is effective notice to the firm. The complaint was maintainable against partners despite non-impleadment of the firm.Treatment of competing arguments: The Court rejected the respondents' argument that the complaint was invalid for non-issuance of notice to the firm, emphasizing the unique nature of partnership firms and partners' joint and several liability.Conclusion: Non-issuance of notice to the firm and non-impleadment of the firm as accused does not render the complaint non-maintainable if notice is issued to partners and complaint is filed against them.Significant holdings and core principles established:'A partnership firm is not a legal entity separate and distinct from its partners but is a compendious or collective term for the partners who constitute the firm.''The expression 'company' in Section 141 of the Negotiable Instruments Act, 1881 is a legislative device or legal fiction which includes a partnership firm for the limited purpose of imposing criminal liability on partners as if they were directors of a company.''Unlike a company which is a separate juristic entity, a partnership firm has no separate legal personality and the partners are personally liable jointly and severally for offences committed by the firm.''Notice issued to partners of a partnership firm is deemed to be notice to the firm for the purposes of Section 138 of the Act.''A complaint under Section 138 of the Act is maintainable against partners of a partnership firm even if the firm itself is not named as an accused or issued notice, since the firm is not a separate legal entity.''The High Court erred in quashing the complaint solely on the ground that the partnership firm was not issued notice or arraigned as an accused.''The liability of partners in a partnership firm for offences under Section 138 read with Section 141 of the Act is joint and several and not vicarious as in the case of directors of a company.''The complainant is permitted to implead the partnership firm as an accused in the complaint to cure any procedural defect.''The complaint bearing STC No.1106/2022 is restored and the trial court is directed to proceed in accordance with law.'