Introduction to the Law of Partnership

The Indian Partnership Act, 1932 governs the law relating to partnership in India. Section 4 of the Act carries the definition of a partnership, which is as follows, “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.[1]” Before the enactment of the Indian Partnership Act, 1932, Section 239 of the Indian Contract Act, 1872 defined partnership as “the relation which subsists between persons who have agreed to combine their property, labour, skill in some business, and to share the profits thereof between them.

Simply speaking, the relation between two or more persons who have agreed to carry on business together and share its profits is known as a partnership. The essential feature of this relation is the concept of mutual agency, whereby every partner is an agent of the other in matters pertaining to the business. It is this feature that allows the partnership to be run by any of the partners, acting on behalf of all the others. The Supreme Court, in the case of Dulichand Laxminarayan v. Commissioner of Income Tax, Nagpur[2], laid down the three crucial elements that are required for constituting a partnership firm, as mandated by Section 4:

  1. An agreement entered into between two or more persons;
  2. The agreement pertains to the sharing of profits arising out of the conduct of the business;
  3. The business must be carried on by all or by any of them acting for all, i.e., the concept of mutual agency.

It was held in Cox v. Hickman[3], that mutual agency is a conclusive test for determining the existence of a partnership. Courts in India have also time and again relied upon this test as the real test for determining the existence of a partnership.

Dishonour of Cheque under Section 138 of NI Act, 1881

Section 138 of the Negotiable Instruments Act, 1881 governs the law with relation to the dishonour of cheques. In a nutshell, the provision mandates that when a cheque is returned unpaid by the bank, for various reasons such as the insufficient balance of money in the account of the drawer of the cheque, the drawer will be deemed to have committed an offence and he/she can be imposed with a term of imprisonment of up to two years and/or with a fine of up to twice the amount of the cheque[4]. Thus, criminal liability is thrust upon the drawer of the cheque as it was his/her duty to make a payment of a certain amount of money to another person to discharge a debt or liability.

For the above clause to take effect, the following pre-requisites[5] must be satisfied:

  1. The cheque is presented to the bank by the holder within six months of it being drawn up (or within the period of its validity);
  2. The holder of the cheque serves notice upon the drawer demanding payment of the amount of money within thirty days of receiving information from the bank that the stipulated cheque has returned unpaid;
  3. The drawer of the cheque fails to make the payment of the amount of money to the holder within fifteen days of the service of notice demanding payment.

As the reason behind the enactment of this provision was to punish those indulging in unfair practices by drawing cheques and purporting to discharge their liabilities but never actually intending to do so in the first place, the offence was made criminal and a term of imprisonment was mandated. However, in the case of Damodar S. Prabhu v. Sayed Babalal[6], the Supreme Court took note of the fact that “Invariably, the provision of a strong criminal remedy has encouraged the institution of a large number of cases that are relatable to the offence contemplated by Section 138 of the Act. So much so, that at present a disproportionately large number of cases involving the dishonour of cheques is choking our criminal justice system, especially at the level of Magistrates’ Courts.” Therefore, it was held in this case that although the offence is criminal in nature, the compensatory aspect of the provision is to be given priority over the punitive aspect.

In the case of N.K. Wahi v. Shekhar Singh[7], the Supreme Court directed that the following must necessarily be shown in an application made under Section 138: “(1) That cheque was issued; (2) The same was presented; (3) It was dishonoured on presentation; (4) A notice in terms of the provisions was served on the person sought to be made liable; (5) Despite service of notice, neither any payment was made nor other obligations, if any, were complied with within fifteen days from the date of receipt of the notice.

Dishonour of Cheque by Partnership Firm [Section 141 of NI Act, 1881]

Section 141 of the Negotiable Instruments Act, 1881 concerns itself with situations where the offence of dishonour of cheque, as provided under Section 138, is committed by a company (including a partnership firm). This section mandates that when a company commits an offence under Section 138, “every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.[8]” However, if any person so liable can prove that he/she was unaware of the commission of the offence or that he/she had exercised due diligence for preventing the commission of the offence, then such person can escape liability.

Sub-clause (2) of this provision lays down that when “it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or another officer of the company, such director, manager, secretary or another officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.[9]” Therefore, it can be deduced that when a partner of a firm is directly responsible for and in-charge of the conduct of the business matters of the firm, he/she can be held liable for the offence along with the company. This principle has been reiterated by the courts in the cases of Katta Sujatha v. Fertilisers & Chemicals, Travancore Ltd.[10] and Lakshmi v. Trishul Coal Services and Transporters[11].

In the latter case, the cheque in question had been issued by the managing partner of the firm and it had not been alleged in the complaint that the petitioner was responsible for the conduct of the business of the firm. Since it was beyond dispute that the managing partner was in charge of the affairs of the firm and no allegations had been preferred against the petitioner, it was held that the prosecution was not entitled to initiate proceedings against every partner of the firm.

In the case of SMS Pharmaceuticals v. Neeta Bhalla[12], which has also been relied upon in the N.K. Wahi judgement, the Court laid down that to fasten a person with vicarious liability under Section 141, it is of paramount importance to make specific averments in the complaint itself. It was explained that “A clear case should be spelt out in the complaint against the person sought to be made liable…. That the respondent falls within the parameters of Section 141 has to be spelt out. A complaint has to be examined by the Magistrate in the first instance based on averments contained therein, if the Magistrate is satisfied that there are averments which bring the case within Section 141, he would issue the process. We have seen that merely being described as a director in a company is not sufficient to satisfy the requirement of Section 141.

It was expounded that the essential requirement of making a person criminally liable under Section 141 is that such a person must have been in charge of and directly responsible for the conduct of the business of the firm at the time of the commission of the offence. Further, the provision does not encapsulate every person at the firm within its ambit as the liability does not arise on account of holding a particular office, rather it arises on account of any act or omission[13]. Therefore, in light of the above interpretation, it is necessary to specifically aver in the complaint that the person being accused was in charge of the operations and business of the firm.

In the case of Shivom Minerals Ltd. v. State[14], the Delhi High Court quashed a complaint because no specific averments had been made in the complaint and continuation of proceedings would be futile. The judgements of the Supreme Court in the cases of Pepsi Foods Ltd. v. Special Judicial Magistrate[15] and Omniplast Private Limited v. Standard Chartered Bank[16] was cited by the Delhi High Court. In both of these, it was held that it is justified to quash a complaint which doesn’t make specific averments or pleadings as it lacks the essential ingredients required under Section 141.

The fact that liability on a person does not accrue merely because the person was holding the position of a director in a firm, was firmly stressed in the case of National Small Industries Corporation v. Harmeet Singh Paintal[17]. It was decided that even if the accused person is a director in the firm, he/she must be active in the everyday working and decision-making of the firm to be made criminally liable.

Conclusion

Dishonour of cheque is one of the most contentious issues in Indian legal jurisprudence, with numerous litigations arising every day. The law has never really been settled on the matter, so to say it has kept evolving. The liability of a partnership firm under Section 138 and 141 of the Negotiable Instruments Act, 1881 extends inasmuch to include all persons who were responsible for the day-to-day conduct of the affairs and business of the firm at the time of the commission of the offence. However, the position of the law has been clarified by numerous judgements that merely being a director in the firm does not attract liability, rather it is imperative to show that the person was directly in-charge of the affairs of the firm and was involved in the decision-making processes. The provision strips all liability from those who can show that they weren’t aware of the commission of the offence or had exercised caution towards preventing the commission of the offence.


[1] Section 4, Indian Partnership Act, 1932.

[2] 1956 AIR 354.

[3] 1860 8 HL Cas 268.

[4] Section 138, The Negotiable Instruments Act, 1881.

[5] Ibid.

[6] (2010) 5 SCC 663.

[7] AIR 2007 SC 1454.

[8] Section 141(1), The Negotiable Instruments Act, 1881.

[9] Section 141(2), The Negotiable Instruments Act, 1881.

[10] (2002) 7 SCC 655.

[11] 1992 Cr. LJ 3616, 3617.

[12] 2005 (8) SCC 89.

[13] Ibid.

[14] 2019 SCC OnLine Del 9329.

[15] (1998) 5 SCC 749.

[16] (2015) 15 SCC 693.

[17] (2010) 3 SCC 330.

Ritwik Tyagi from National Law University, Nagpur

Ritwik loves reading, researching and penning down creations of his mind. For any clarifications, feedback and advice, you can drop him an email at ritwik.tyagi27@gmail.com

editor: vatsala sood

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