Partnership firm liable under S 138 NI Act even without separate statutory notice: SC

It also stated that if the partners of the partnership firm are proceeded against, they are jointly and severally liable, along with the partnership firm, as well as inter se, the partners of the firm.

A bench of Justices B V Nagarathna and Satish Chandra Sharma said 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 bench said.

Court allowed an appeal filed by Dhanasingh Prabhu against the Madras High Court's judgment of February 26, 2024, which quashed a complaint filed against respondents Chandrasekar and another under Section 138 of the NI Act with regard to dishonour of a cheque issued to repay a debt of Rs 21 lakh.

The high court had noted that while the cheque was issued on behalf of the partnership firm, 'Mouriya Coirs’, no statutory notice was issued to the partnership firm, and it was also not arraigned as an accused in the complaint. Therefore, the high court opined that, as the rigours of Section 141 of the Act were not complied with, the complaint was not maintainable as against both the respondents, who were merely partners in the firm.

Examining the appeal, court considered the points around the interpretation of the expressions, company and director in the Explanation to Section 141 of the Act in the context of the partners of a partnership firm.

Court said, "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".

If Parliament intended that the partners of the firm be construed as separate entities for the purpose of penalty, then it would have provided so by expressly stating that the firm, as well as the partners, would be liable separately for the offence under Section 138 of the Act, the bench said.

"Such an intention does not emanate from Section 141 of the Act as the offence proved against the firm would amount to the partners of the firm also being liable jointly and severally with the firm. Therefore, there is no separate liability on each of the partners unless subsection (2) of Section 141 applies, when negligence or lack of bona fides on the part of any individual partner of the firm has been proved," the bench said.

In the present case, court noted the notice was issued by the complainant to both the partners, who were named as accused as well.

It pointed out that a partnership firm is not distinct from the partners who comprise the partnership.

"The partners who form a partnership firm are personally liable in law along with the partnership firm. It is a case of joint and several liability and not vicarious liability as such. Therefore, if the complainant herein has proceeded only against the partners and not against the partnership firm, we think it is not something which would go to the root of the matter so as to dismiss the complaint on that ground," the bench said.

Rather, the court felt, opportunity could have been given to the complainant to implead the partnership firm also as an accused in the complaint even though no notice was sent specifically in the name of the partnership.

Alternatively, the court said, notice to the partners/accused could have been construed as notice to the partnership firm also.

"We say so for the reason that unlike a company which is a separate juristic entity from its directors thereof, a partnership firm comprises of its partners who are the persons directly liable on behalf of the partnership firm and by themselves," the bench said.

In the case of a partnership firm, the bench said, the said juristic entity is always understood as a compendious term, namely, the partnership firm along with its partners.

"Therefore, if the appellant-complainant had proceeded only against the partnership firm and not its partners then possibly the respondents would have been right in contending that the complaint was not maintainable, but here the case is reversed. The complainant herein has not arraigned the firm but has arraigned the partners of the firm as accused and has also issued notice to them; therefore, we find that the defect, if any, is not significant or incurable in these circumstances," the bench said.

It granted permission to the complainant to arraign the partnership firm also as an accused in the complaint. It noted the cheque was issued in the name of the firm and signed by one of the partners, for and on behalf of the other; therefore, the liability was deemed to be on both the partners of the firm.

Dealing with the issue of the difference between a partnership firm and a company, the court pointed out that Explanation to Section 141 of the NI Act provides that for the purposes of that section, a company includes a firm or other association of individuals.

Section 4 of the Partnership Act, however, clearly implies that a firm or partnership is not a legal entity, separate and distinct from its partners, the bench said.

"A firm is not an entity of persons in law but is merely an association of individuals," the court said.

A firm may not be a legal entity in the sense of a corporation or a company incorporated under the Companies Act, 1956 or 2013, but it is still an existing concern where business is done by a number of persons in partnership, it added.

On the issue of separate legal personality, the bench said, a partnership firm, unlike a company registered under the Companies Act, does not possess a separate legal personality, and the firm’s name is only a compendious reference for describing its partners.

This fundamental distinction between a firm and a company rests on the premise that the company is separate from its shareholders, court pointed out.

Court emphasised that the partners and the partnership firm are one and the same. Unlike a company, a partnership firm has no independent corporate existence and has no distinct legal persona independent of its partners. Similarly, the partners of a firm are co-owners of the property of the firm, unlike shareholders in a company, who are not co-owners of the property of the company.

Court further said, as a logical corollary of distinct and separate juristic identity, an incorporated company also has perpetual succession, i.e., perpetual existence agnostic of transfer of shares.

"A company does not ordinarily extinguish because of change in shareholding. On the other hand, a partnership firm’s fundamental identity is contingent on the partners and undergoes a change with a change in partners, subject to contract. Section 42(c) of the Partnership Act provides that subject to contract between the partners, a firm is dissolved by the death of a partner," the court said.

The bench also pointed out that the partners of a firm have unlimited liability to the creditors of the firm, as opposed to a limited company or a limited liability partnership.

Insofar as criminal liability is concerned, the court said, once it is established that an illegal act has been committed by the firm or its partners, then the partners will be jointly liable for it. Moreover, the act constituting an offence will also have to be decided with reference to the statute creating such an offence i.e. the Negotiable Instruments Act, it added.

Since the firm by itself cannot transact any business, if a partner of the firm commits any breach, all the partners would become liable for the consequent penalties, just as the firm would be liable. Further, if a penalty is imposed on a partnership firm for contravention of a statute, it amounts to levy of penalty on the partners also and there is no separate or independent penalty on the partners for the said contravention, the court said.

However, the liability of a shareholder in a company is limited to the nominal value of shares held by them or the amount guaranteed by the shareholder. The separate property of the shareholder is beyond a creditor seeking to enforce its dues against the company, it added.

The court also said that the partners of a firm are co-owners of the property of the firm, unlike shareholders in a company who are not co-owners of the property of the company.

The bench finally held that 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.