2025 (9) TMI 325 - HC - Indian Laws

Petition dismissed: no recorded settlement under Section 138; partner prima facie vicariously liable Section 141(1), discharge denied Section 142

HC dismissed the petition, holding there was no recorded or court-accepted settlement that subsumed the Section 138 NI Act complaint; the alleged ... Dishonour of Cheque - Funds Insufficient - Settlement arrived between the Parties - vicarious role of petitioner, being a sleeping partner. Settlement Agreement between the Parties - HELD THAT:- It is evident that there was neither a concluded Settlement between the parties that was brought on record nor any statement of the parties was recorded of them having entered into the compromise. So being the case, the contention of the Petitioner that the Complaint got subsumed in the Settlement is not tenable - It may also be observed that this alleged Settlement Agreement is dated 02.09.2021, while the aforementioned proceedings are of March, 2024. Had there been any concluded Settlement, there was nothing which prevented the parties to bring it on record when the ld. Trial Court directed them to explore settlement and referred them to Mediation Centre. Therefore, it cannot be said that the present matter ever got settled through any Mutual Settlement Agreement or that the Complaint under S. 138 NI Act is liable to be held to be subsumed in the Settlement. In the case of Dayawati [2017 (10) TMI 1063 - DELHI HIGH COURT] the Court in the context of Mediated Settlement, had noted that whenever there is a Settlement between the parties in Mediation, the Magistrate shall record the statement on oath of the parties affirming the terms of Settlement that they have entered into it voluntarily, out of their own free will and after understanding the contents and implications thereof, affirming the contents of the Agreement placed before the Court and confirming their signatures thereon. A clear undertaking to abide by the terms of the Settlement should also be recorded as a matter of abundant precaution. It is, therefore, evident that for the Settlement to be binding between the parties to consequently result in disposal of the Complaint under Section 138 NI Act on account of compounding, there are specific requirements of statements to be recorded that they shall abide by the Settlement and the corresponding order of the Court accepting the terms of Settlement and compounding the offence under Section 138 NI Act - In the present case as has already been noted above, even if there was a full and final Settlement, it was out of Court and was never intended for compounding of this Complaint under Section 138 NI Act. There is nothing on record to show that the present Complaint was subsumed in the Settlement dated 02.09.2021. The contention raised by the Petitioner in this regard is not tenable and is hereby, rejected. Petitioner being a Sleeping Partner - HELD THAT:- Partnership Act provides that every partner has a right to take part in the conduct and business of a partnership firm and is bound to attend the duties diligently for the conduct of the business of the firm. Section 18 provides that a partner is an agent of the Firm for the purpose of business of the firm. Section 22 prescribes that in order to bind a Firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the name of the firm, or in any other manner expressing or implying an intention to bind the firm which would mean that every partner is bound by it. Section 25 prescribes that every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner - The Court underscored that the essence of the allegations is more important than their form. If the Complaint sufficiently indicates that the Director was actively involved in the Company’s day-to-day operations and played a role in the transactions in question, this is enough to meet the threshold for vicarious liability under Section 141(1) NI Act, even if the statutory expression “in charge of and responsible for the conduct of the business” is not quoted verbatim. There is nothing at this stage to show that the Petitioner was a sleeping partner who was not involved in the day-to-day affairs and had no concern with the business of the Firm. Therefore, her defence that she was not involved in the conduct of the business of the Firm, would have to be proved during the trial - Therefore being a partner of the accused Firm, she is prima facie liable for the acts of the Firm in terms of Section 141 NI Act. Thus, it is held that the Petitioner is not entitled to be discharged in the Complaint under Section 138 read with Section 142 of N.I. Act - petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a criminal complaint under Section 138 of the Negotiable Instruments Act can be quashed on the ground of an out-of-court Settlement between the parties that was not placed on record or recorded/accepted by the Magistrate for compounding. 2. Whether a partner alleged to be a 'sleeping partner' can be discharged from criminal liability under Section 138 read with Section 141 of the Negotiable Instruments Act on the basis that she had no role in the conduct of the firm's business and therefore cannot be held vicariously liable. ISSUE-WISE DETAILED ANALYSIS - Settlement subsuming the Complaint Legal framework: For compounding and disposal of complaints under Section 138 NI Act by reason of settlement, the Magistrate must record on oath the parties' statements affirming voluntary entry into the terms, record clear undertakings to abide by the Settlement, and judicially satisfy that the Settlement is voluntary, genuine, equitable, lawful and not opposed to public policy; the Court must then accept the terms and compound the offence so that the original complaint is subsumed by the Settlement. Precedent treatment: The judgment relies on and applies principles articulated in decisions addressing mediated settlements and the subsuming effect of Settlement Agreements (including the statement that a Settlement subsumes the original complaint where parties have agreed and the consequences of non-compliance are accepted). The authorities cited are treated as supporting the proposition that an out-of-court Settlement not brought on record and not processed by the Magistrate does not automatically result in compounding. Interpretation and reasoning: The Court examined the record and found (a) the Settlement was out-of-court and was never placed on record before the Magistrate, (b) no statements under oath were recorded, (c) no undertaking was recorded accepting the consequences of non-compliance, and (d) despite judicial directions to explore settlement and referral to Mediation Centre, there was no evidence of a mediated settlement being recorded. The Court reasoned that procedural and substantive safeguards are mandatory to give a Settlement the effect of compounding under Section 138 and that parties cannot unilaterally absolve criminal proceedings by entering into an agreement without bringing it before the Court and obtaining compounding orders. Reliance on authority stressing that a Settlement must be recorded and judicially accepted was applied to conclude that the out-of-court Settlement did not subsume the Complaint. Ratio vs. Obiter: Ratio - A Settlement not brought on record, not recorded under oath, and not accepted by the Magistrate cannot subsume and terminate criminal proceedings under Section 138 NI Act; compounding requires compliance with mandatory judicial safeguards. Obiter - Observations on what would constitute acceptable steps by a Magistrate when a mediated Settlement is presented (procedural recommendations) serve as guidance but arise from applying existing principles. Conclusion: The Complaint could not be quashed on the basis of the alleged Settlement because the Settlement was never placed on record, parties' statements/undertakings were not recorded, and no compounding order was obtained; therefore the alleged Settlement does not absolve the accused or terminate proceedings under Section 138 NI Act. ISSUE-WISE DETAILED ANALYSIS - Sleeping partner and vicarious liability under Section 141 Legal framework: Section 141 of the Negotiable Instruments Act imputes criminal liability to persons 'in charge of, and responsible to, the company/firm for the conduct of the business' for offences under Section 138; the Explanation equates a 'director' with a partner in a firm. Vicarious liability arises where a person is in overall control of day-to-day business; liability under the second limb arises where offence is committed with consent, connivance or attributable to neglect. Partnership law principles (agency, joint and several liability) render partners agents and potentially liable for acts of the firm. Precedent treatment: The judgment follows and applies recent decisions interpreting Section 141 to focus on the substance of allegations (active involvement in day-to-day operations) rather than literal reproduction of statutory language in the complaint. Authorities cited are used to support that partners may be vicariously liable and that complaints need only contain averments sufficient to indicate involvement in the firm's business. The Court also refers to the principle that pleading need not repeat statutory verbiage so long as the essence is conveyed. Interpretation and reasoning: The Court noted undisputed facts: the petitioner admitted partnership in the firm; legal notice was addressed to the firm and named both partners; no reply or rebuttal claiming sleeping partner status was placed on record; no partnership deed or contemporaneous documentary evidence was produced to demonstrate sleeping partner status; statutory provisions of Partnership Act impose agency and joint/several liability on partners. Applying the standard that prima facie allegations sufficing to show involvement in the firm's business support proceeding, the Court held that the defence of being a sleeping partner is a matter of fact to be tested at trial and cannot form the basis for quashing at the stage of Section 482 CRPC. The Court further relied on authority holding that complaints need not verbatim recite Section 141 language if the essence of involvement is pleaded. Ratio vs. Obiter: Ratio - A partner who is prima facie shown to be part of the firm and against whom specific averments (e.g., notice addressed to partners, allegations of firm entering into agreements) exist cannot be discharged at the pre-trial/quashing stage on the ground of being a 'sleeping partner' absent documentary or prima facie evidence to that effect; such defence is to be tested at trial. Obiter - Observations on what documentary evidence (e.g., partnership deed specifying sleeping partner status) could have been produced to support the defence are illustrative guidance. Conclusion: The petitioner, being an acknowledged partner and absent any prima facie documentary proof of sleeping partner status or denial in response to the demand notice, is prima facie liable under Section 141 read with Section 138 NI Act; quashing on the ground of being a sleeping partner is not warranted at this stage and the defence must be raised and proved at trial. OVERALL CONCLUSION Combined application of the legal principles led the Court to dismiss the prayer for quashing: (a) an out-of-court Settlement not placed on record and not judicially recorded/accepted does not subsume or compound the original complaint under Section 138 NI Act; and (b) the alleged position of a partner as a 'sleeping partner' cannot negate prima facie vicarious liability under Section 141 where partnership status and substantive averments linking the partner to the firm's transactions exist, so that the matter must proceed to trial to adjudicate the disputed factual contentions.