Partnership Firms and Liability for Cheque Dishonour under Section 138 of Negotiable Instruments Act, 1881

Partnership Firms and Liability for Cheque Dishonour under Section 138 of Negotiable Instruments Act, 1881 

In the case of Dhanasingh Prabhu v. Chandrasekar [2025] GCtR 1629 (SC) dealing with a case related to allegations under S.138 of Negotiable Instruments Act, 1881 it was commented that "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. The notice issued to the partners of the firm in the instant case shall be construed to be a notice issued to the partnership firm."

In the instant case, the notice was sent by the complainant to both the partners of the firm. 

The points that arise for consideration revolve around the interpretation of the expressions, company and director in the Explanation to Section 141 of the NI Act, 1881 in the context of the partners of a partnership firm.

Even if we have to come to the conclusion that the juristic entity i.e., the partnership firm is the primary accused in the instant case it would be necessary to also state that such a juristic entity, namely, a partnership firm is not distinct from the partners who comprise the partnership. In other words, if the complainant had proceeded only against the partnership firm and not the partners it possibly could have been held that the partnership firm in the absence of its partners is not a complete juristic entity which can be recognised in law and therefore cannot be proceeded against. It is necessary to reiterate that a partnership firm in the absence of its partners cannot at all be considered to be a juristic entity in law. On the other hand, 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. 

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. Therefore, a partnership firm, in the absence of the partners being arraigned as accused would not serve the purpose of the case and would be contrary to law. On the other hand, even in the absence of making a partnership firm an accused in the complaint, the partners being made the accused would be sufficient to make them liable inasmuch as the partnership firm without the partners is of no consequence and is not recognised in law. This is because in the case of a partnership firm, the said juristic entity is always understood as a compendious term namely, the partnership firm along with its partners.

Predominantly a product of judge-made law, the law of partnership was first codified in India by the Indian Partnership Act, 1932. Prior to the coming in force of the Partnership Act, Chapter XI of the Indian Contract Act, 1872 (hereinafter ‘ICA’) defined a partnership, outlined the rights and obligations of partners and provided various provisions governing the operation and existence of partnerships. The Partnership Act was promulgated as it was considered expedient to define and amend the law relating to partnership. As it stands today, partnership law is codified in the Partnership Act and the Limited Liability Partnership Act, 2008. It is trite that these legislations, like all codifications of partnership law in common law, are based on the law of agency. Section 4 of the Partnership Act, 1932 defines a partnership, partner, firm and firm name. It is pertinent to recall 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. Nevertheless, the distinction is crucial because it lends credence to the interpretation that reference in Section 141 of NI Act is as much to the partners of the firm as it is to directors of a company. In Section 4 of the Partnership Act, it is clearly stated that persons who have entered into partnership with one another are individually called partners and collectively a firm and the name under which their business is carried out is called a firm name. Thus, while partnership is the relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all, the persons are collectively called a firm and the name of the firm is the firm name which is a compendious or collective term of partnership of the partners. The said Section also clearly implies that a firm or partnership is not a legal entity, separate and distinct from its partners. 

Firm is a compendious term not distinct of the individuals who compose the firm. In other words, partnership is merely a convenient name to carry out business by partners. Thus, a firm is not an entity of persons in law but is merely an association of individuals and firm name is only a collective name of those individuals who constitute the firm. In other words, the firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. Thus, 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.

Insofar as the statutory definition of a company is concerned, the legislature has found it particularly cumbersome to provide a descriptive and inclusive definition. Perhaps this is why the Parliament in its wisdom defined ‘company’ in Section 2(2) of the Companies Act, 2013 (‘Companies Act’) not by enumerating the essential features of a company but “as a company incorporated under this Act or under any previous company law”.

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. The partnership name being only a compendious method of describing the partners, it stands to reason that a reference to the partners in their capacity as partners of the firm will be sufficient to impute liability on the partners themselves, whereas directors of a company are made liable vicariously through the company, upon whom falls the primary liability. Thus, 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. 

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, 1932 provides that subject to contract between the partners, a firm is dissolved by the death of a partner. The liability of partners for the debts of the business is unlimited and they are jointly and severally liable for all business obligations of the partnership firm. Sections 25 and 26 of the Partnership Act, 1932 are relevant in this regard.

Section 25 of Partnership Act, 1932 provides that every partner is liable jointly with all the other partners and also severally for all acts of the firm done by the partner. Since a firm is not a legal entity but only a collective name for all the partners, it does not have any legal existence apart from its partners. Therefore, any liability of a firm has the same effect of a liability against the partners. This is because, the partners remain liable jointly and severally for all acts of the firm. 

Debt of the firm is the personal debt of a partner and the debt of the firm has to be incurred by each partner as a financial personal liability.

Insofar as criminal liability is concerned, 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, which is the Act under consideration. When Section 25 of the Partnership Act is read together with Section 145 of the NI Act, 1881 in the context of dishonour of a cheque, the partner of a firm who is also liable jointly with a firm, can however rebut the statutory presumption. 

Conversely, Section 26 of Partnership Act, 1932 states that where by the wrongful act or omission of a partner, acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injuries are caused to any third party, or any penalties are incurred, the firm is liable therefore to the same extent as the partner. The liability of the firm for acts done by the partner would arise when such acts are done in the ordinary course of the business of the firm. 

Moreover, 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.

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 is therefore appropriate to remind ourselves that a partnership firm, unlike a company registered under the Indian Companies Act or a limited liability partnership registered under the Limited Liability Partnership Act, 2008, is not a distinct legal entity and is only a compendium of its partners. Even the registration of a firm does not mean that it becomes a distinct legal entity like a company. Hence, 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.

Section 138 of the NI Act creates an offence for dishonour of a cheque for, inter alia, insufficiency of funds in the account by a deeming fiction. The complainant who is a victim of the dishonour of cheque issued by an accused has the right to file a private complaint in terms of Section 200 of the CrPC, 1973 (equivalent to Section 223 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (for short, “BNSS”)). When the said offence is proved against an individual/natural person, he is punished with imprisonment for a term which may be extended to two years or with fine which 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 NI Act applies. The said Section states that if the person committing an offence under Section 138 of the N Act is a company, 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. Since an artificial juristic entity such as a company cannot be punished with imprisonment, by a deeming fiction certain persons associated with such an artificial juristic entity are deemed to be guilty of the offence and made liable to be proceeded against and punished accordingly. This is an instance of vicarious liability on 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. This is for the reason that a company is a separate entity vis-à-vis its shareholders or those who are in charge of the conduct of its business since a company is an artificial juristic entity. Thus, the liability would be on the company as well as on the category of persons mentioned above. Such a person must be both in charge of, as well as responsible to, the company for the conduct of the business of the company. However, the aforesaid category of person who is deemed to be guilty of the offence along with the company, can escape punishment (i) if he can prove that the offence was committed without his knowledge; or (ii) that he had exercised all due diligence to prevent the commission of such an offence. Hence, by way of a proviso to sub-section (1) to Section 141 of the Act, two defences are provided for the category of persons named in sub-section (1) of Section 141 of NI Act. 

The second proviso to sub-section (1) of Section 141 is an exception for a person who is a director of the company who shall not be liable for prosecution under Chapter XVII of of NI Act, 1881.

Sub-section (2) of Section 141 of NI Act begins with a nonobstante clause. It extends the scope of categories of persons associated with the company who could also be deemed to be guilty of an offence under Section 138 of the Act and shall be liable to be proceeded against and punished accordingly. Sub-section (2) of Section 141 states that where the offence has been committed by a company and it is proved that the offence has been committed with the (i) consent; or (ii) connivance of; or (iii) is attributable to, any neglect on the part of any director, manager, secretary or other officer of the company, such aforesaid categories of persons shall also be deemed to be guilty, proceeded against and punished accordingly. While sub-section (1) of Section 141 restricts the category of persons who would be deemed to be liable when the offence is committed by a company, sub-section (2) of Section 141 extends the scope of liability to further categories of persons namely, director, manager, secretary or other officer of the company to be made liable provided there is proof that such category of persons associated with the company had committed the offence with the consent or connivance of, or due to any negligence on their part. The expression “shall also be deemed to be guilty” in sub-section (2) of Section 141 of the Act would imply that the object and purpose of the said provision is to encompass the categories of persons mentioned in that sub-section owing to a criminal intent or negligence attributable on their part.

Thus, while under sub-section (1) of Section 141 of the NI Act, the criminal liability on the category of persons named in the said sub-section is owing to the position that person holds in the company, when the company is said to have committed the offence under Section 138 and therefore the deeming fiction under sub-section (2) of Section 141 of the Act, on the other hand, there has to be a proof with regard to consent or connivance for the committing of the offence or a criminal negligence on the part of the director, manager, secretary or other officer of the company who shall also be deemed to be guilty of the offence under Section 138 of the Act. Thus, under sub-section (2) of Section 141 of the Act, when the company is guilty of the offence under Section 138 of the Act, a director, manager, secretary or other officer of the company shall also be deemed to be guilty of the offence and liable to be proceeded against and punished accordingly, provided there is proof of mens rea on the part of such category of persons. Hence, a director, manager, secretary or other officer of the company cannot be proceeded against per se by virtue of the position they hold in the company but can be proceeded against only when there is proof that the offence under Section 138 was committed by the company with their consent or connivance or due to negligence on their part. The standard of proof is higher under sub-section (2) of Section 141 vis-à-vis the category of persons mentioned therein with regard to their specific role in the commission of the offence under Section 138. This implies that the primary liability of the company is transferred to the above categories of persons who are deemed to be guilty vicariously having regard to the deemed penal nature of the offence under Section 138 of the Act.

The Explanation to Section 141 has two clauses. Clause (a) defines a company to mean any body corporate and includes a firm or other association of individuals. The expression “company” encompasses, inter alia, a body corporate which refers to a company incorporated under the provisions of the Companies Act or a statutory body. The expression “company” is inclusive inasmuch as it includes a firm, meaning thereby a partnership firm, as per the provisions of the Partnership Act, as well as a limited liability partnership or other association of individuals. Clause (b) of the Explanation defines a director as mentioned in subsection (2) of Section 141 of the Act in relation to a firm to mean a partner in the firm. Thus by a legislative device an inclusive definition is added by way of an Explanation to Section 141 of the Act inasmuch as in jurisprudence and in law, a company is a distinct body corporate and separate juristic entity as compared to a partnership firm. 

On a conjoint reading of the various clauses of Section 141, what emerges is that the expression “company” has been used in an expansive way to include not just a company incorporated under the provisions of the Companies Act, 2013 stricto sensu but also any body corporate such as a statutory company as well as other artificial juristic entity such as a partnership firm or other association of individuals. Hence, the expression “director” in sub-section (2) of Section 141 is not restricted to a director of an incorporated company or a statutory body, but also includes a partner of a firm. The expression “director” in sub-section (2) of Section 141 of the Act in relation to a firm means a partner, which is also a legislative device adopted by the Parliament knowing fully well and being conscious of the fact that a partnership firm, jurisprudentially speaking, does not stand on par with a director of a body corporate. Since the Parliament has used the expression “company” encompassing all types of juristic persons, it was necessary to give an expanded definition to the expression “director” in relation to a firm to mean a partner in the firm. Therefore, the inclusion of a firm within the meaning of the expression “company” is by a legal fiction and by way of a legislative device only for the purpose of creating a liability on the partners of the firm, which in any case, they are liable under the law of partnership in India. But the definition of the word company including a partnership firm has been incorporated in the Explanation for the sake of convenience, as otherwise a similar provision would have to be inserted for the very same purposes. Instead of replicating the same definition for different kinds of juristic entities, the Parliament has thought it convenient to add an Explanation to define a company for the purpose of Section 141 of the Act in the context of an offence committed by, inter alia, a company, as understood within the meaning of the Companies Act, and also include a firm or other association of individuals within the definition of company. Similarly, under clause (b) of the explanation, the expression “director”, in relation to a firm, means a partner in the firm.

While a director is a separate persona in relation to a company, in the case of a partnership firm, the partner is not really a distinct legal persona. This is because 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. Thus, the partnership firm has no separate recognition either jurisprudentially or in law apart from its partners. Therefore, while a director of a company can be vicariously liable for an offence committed by a company, insofar as a partnership firm is concerned, when the offence is committed by such a firm, in substance, the offence is committed by the partners of the firm and not just the firm per se. Therefore the partners of the firm are liable for the dishonour of a cheque, even though the cheque may have been issued in the name of the firm and the offence is committed by the firm. Therefore, in law and in jurisprudence, when a partnership firm is proceeded against, in substance, the partners are liable and the said liability is joint and several and is not vicarious. This is unlike a company which is liable by itself and since it is an artificial juristic entity, the persons in charge of the affairs of the company or who conduct its business only become vicariously liable for the offence committed by the company.

However, jurisprudentially speaking, the partners of a partnership firm constitute the firm and a firm is a compendious term for the partners of a firm. This is opposed to the position of a director in a company which is a body corporate stricto sensu and such a company is a separate juristic entity vis-à-vis the directors. On the other hand, a partnership firm has no legal recognition in the absence of its partners. 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. This underlying distinction between a partnership firm and a company which is a body corporate has to be borne in mind while dealing with an offence committed by a company or a partnership firm, as the case may be, within the meaning of Section 138 read with Section 141 of the Act. To reiterate, 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 and one cannot proceed against only the firm without the partners being made liable.

Therefore, 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 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.

Thus, when it is a case of an offence committed by a company which is a body corporate stricto sensu, the vicarious liability on the categories of persons mentioned in sub-section (1) and sub-section (2) of Section 141 of the Act accordingly would be proceeded against and liable for the offence under Section 138 of the Act. In the case of a partnership firm on the other hand, when the offence has been proved against a partnership firm, the firm per se would not be liable, but liability would inevitably extend to the partners of the firm inasmuch as they would be personally, jointly and severally liable with the firm even when the offence is committed in the name of the partnership 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.