The Supreme Court of India has ruled that a criminal complaint for cheque dishonour under Section 138 of the Negotiable Instruments Act, 1881, cannot be dismissed solely on the ground that the partnership firm, on whose behalf the cheque was issued, was not arraigned as an accused. A bench of Justice B.V. Nagarathna and Justice Satish Chandra Sharma held that the liability of partners is joint and several, not vicarious, and a notice to the partners can be construed as a notice to the firm.
The Court set aside a Madras High Court judgment that had quashed such a complaint, restoring the proceedings before the trial court and granting the complainant permission to implead the partnership firm as an accused.
Background of the Case
The case originated from a complaint filed by Dhanasingh Prabhu (appellant) against Chandrasekar and another partner (respondents) of the firm ‘Mouriya Coirs’. The appellant had advanced a loan of ₹21,00,000 to the respondents for their business. To discharge this liability, respondent No. 1 issued a cheque for the full amount on February 1, 2021, drawn on the partnership firm’s bank account and signed by him.
The cheque was dishonoured upon presentation on February 2, 2021, with the bank noting that the firm’s account had been frozen. Following the dishonour, the appellant issued a statutory notice on March 1, 2021, to both partners individually. However, the notice was not addressed to the partnership firm, and the firm was not named as an accused in the subsequent complaint (STC No. 1106/2022) filed before the Judicial Magistrate No. II, Pollachi.
The respondents filed a petition under Section 482 of the Code of Criminal Procedure, 1973, before the Madras High Court, which quashed the complaint on February 26, 2024. The High Court reasoned that since the cheque was issued on behalf of the firm, the failure to issue a statutory notice to the firm and to arraign it as an accused was a fatal defect under Section 141 of the Negotiable Instruments Act, 1881 (the Act), rendering the complaint against the partners non-maintainable. The complainant then appealed this decision to the Supreme Court.
Arguments of the Parties
The appellant argued that a partnership firm is not a separate legal entity like a company but is merely a “compendious name for its partners.” It was submitted that partners have unlimited, joint, and several liability, and therefore, prosecuting them individually without arraigning the firm was permissible.
Representing the respondents, Senior Counsel Sri S. Nagamuthu contended that the Explanation to Section 141 of the Act creates a legal fiction by including a “firm” within the definition of a “company” and a “partner” within the definition of a “director.” He argued that this meant the firm must be the primary accused for an offence under Section 138, and partners could only be held vicariously liable. In the absence of the firm being named as an accused, he submitted, the complaint was rightly quashed.
The Court’s Analysis
The Supreme Court framed the core issue as whether the High Court was correct to dismiss the complaint because the partnership firm was not mentioned in the statutory notice or the complaint.
The bench undertook a detailed examination of the legal status of a partnership firm versus a company, concluding that the two are fundamentally different. The Court held that precedents like Aneeta Hada vs. Godfather Travels & Tours (P) Ltd., which mandate impleading a company as an accused, do not apply to partnership firms.
The judgment drew several key distinctions:
- Juristic Personality: The Court emphasized that a company is a separate juristic person, distinct from its directors. A partnership firm, however, has no legal existence independent of its partners. The Court reiterated that a “firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership.”
- Nature of Liability: The liability of company directors is vicarious. In stark contrast, the liability of partners is joint and several. The Court stated, “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”. Therefore, when a firm commits an offence, it is the partners themselves who have committed it.
- Section 141 of the Act: The Court clarified that the inclusion of a “firm” under the definition of “company” in the Explanation to Section 141 is a “legal fiction” and a “legislative device” for convenience. It does not alter the fundamental legal character of a firm. The judgment notes, “a partnership firm is not really a legal entity separate and distinct as a company is from its directors but can have a legal persona only when the partnership firm is considered along with its partners.”
Based on this reasoning, the Court found that not arraigning the firm as an accused was not a fatal flaw. It held that “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 Court further opined that the notice issued to the partners could be construed as a notice to the firm, and the defect was curable. It observed, “we think it is not something which would go to the root of the matter so as to dismiss the complaint on that ground. Rather, opportunity could have been given to the complainant to implead the partnership firm also as an accused”.
Decision
The Supreme Court allowed the appeal and set aside the impugned order of the Madras High Court. The complaint bearing STC No.1106/2022 was restored to the file of the Judicial Magistrate No. II, Pollachi. The Court granted permission to the appellant to “arraign the partnership firm as an accused in the complaint” and directed the trial court to dispose of the matter in accordance with law.
