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

CHAHAT JAIN Versus M/s INNOCEPT GLOBAL, M/s WHITEFOX INDIA, ARJUN JAIN

CHAHAT JAIN Versus M/s INNOCEPT GLOBAL, M/s WHITEFOX INDIA, ARJUN JAIN - 2025:DHC:7515 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.