Cheque Bounce: Supreme Court Rules Partners Liable Even If Firm Not Made Accused

The Supreme Court of India has said that if a cheque issued by a partnership firm bounces, a legal case under Section 138 of the Negotiable Instruments Act, 1881, can still be filed against the individual partners. This is allowed even if the partnership firm itself is not named as an accused in the case.

The current petition is being filed in the Supreme Court of India by an individual named Dhanasingh Prabhu (Appellant) against Chandrasekar and Another (Respondents). The appellant has filed this criminal appeal because they are dissatisfied with the final judgment and order passed by the Madras High Court on February 26, 2024. In that decision, the High Court allowed Criminal Original Petition No. 1533/2024 filed by the accused (respondents) and, as a result, cancelled the complaint (STC No. 1106/2022) that the appellant had filed against them under Section 138 of the Negotiable Instruments Act, 1881, which deals with cheque bounce cases.

The dispute began when a cheque was issued in the name of a partnership firm, but the legal notice under Section 138 was sent only to the individual partners. The firm itself was not sent any notice and was not included in the complaint. Because of this, the Madras High Court dismissed the complaint filed by the appellant. However, the Supreme Court later set aside that decision.

The court said, “When the said offence is proved against an individual/natural person, he is punished with imprisonment for a term that may be extended to two years or with a fine that may extend to twice the amount of the cheque. But when such an offence is committed by a company, which is an artificial juristic entity, Section 141 of the Act applies.”

Section 141 states that if an individual committing an offence under Section 138 of the Act is a firm, then every person who was in charge of the firm and responsible for running its business at that time, along with the firm itself, will be considered to be guilty of the offence and can be punished. Since a firm is not a real person and cannot be sent to jail, the law treats certain people connected to the company as responsible. These people can then be charged and punished for the offence.

However, the designated above-category individual who is considered to be guilty of the offence along with the firm, can escape from punishment under the following conditions:

• They can prove that they did not know the offence was happening; or
• They can show that they did everything they reasonably could to stop it from happening.

This is stated as a proviso to sub-section (1) of Section 141 of the Act. Hence, individuals mentioned in that part of the law have two possible ways to defend themselves.

Justice Nagarathna, who gave the judgment, highlighted that a partnership firm is not a separate legal person from its partners. This means the partners themselves are legally responsible for what the firm does; they are each responsible on their own, together, and for each other’s actions done in the name of the firm.

To announce its decision, the court took reference from various previous judgements, among them one is Aneeta Hada vs. Godfather Travels & Tours (P) Ltd., (2012) 5 SCC 661 (“Aneeta Hada”), which concluded that a company must first be proven to have committed an offence before others, like its directors or employees, can be held responsible for it. The words “as well as the company” in the law clearly show that the company must be included as an accused in the case. Only then can others be held responsible based on the idea of vicarious liability.

This is because a company is a separate legal entity. Therefore, it must be named and tried as an accused for the case under Section 141 of the Act to proceed properly. The Court said that unless the company is found guilty under Section 138 read with Section 141, the others (like directors) cannot be held liable. In the case being discussed, the company involved was a private limited company registered under the Companies Act, 1956.

Finally, the court noted that, “Since the 55 liability is joint and several, even in the absence of a partnership firm being proceeded against by the complainant by issuance of a legal notice as mandated under Section 138 of the Act or being made an accused specifically in a complaint filed under Section 200 of the CrPC (equivalent to Section 223 of the BNSS), such a complaint is maintainable.”

Even if a partnership firm is not directly named as an accused, the complaint is still valid if it is filed against the partners. This is because, in law, the partners and the firm are equally responsible for the actions of the firm. Therefore, even without sending a legal notice to the firm or naming it in the complaint, the case can continue as long as the partners are named.

In comparison, if a company, which is a separate legal entity, commits an offence, then the individuals in charge can also be considered responsible under certain legal provisions.

However, in the case of a partnership firm, the firm itself is not treated as a separate legal entity like a company. Instead, the firm is just a name representing its partners. Therefore, if an offence is proven to be committed by the firm, the partners are automatically considered responsible, both individually and together. There is no need to prove that each partner was at fault unless specific wrongdoing (like negligence or bad faith) by a particular partner is shown.

As a result, the High Court was wrong to dismiss the complaint just because the partnership firm was not named or notified separately. The notice sent to the partners is considered as a notice to the firm itself (‘Mouriya Coirs’ in this case). The court now permits the complainant to add the firm as an accused.

In conclusion, the order of the High Court is quashed, and the complaint is restored. The trial court in Pollachi is instructed to continue with the case according to the law.