NI Act: For Fastening Criminal Liability, Not Necessary For Partner Of Firm To Know Every Transaction, SC Holds

The Supreme Court of India, on September 16, held that for fastening the criminal liability, there was no legal requirement for the complainant to show that the accused partner of the firm was aware about each and every transaction.

Bench of Justices Surya Kant and JB Pardiwala heard and allowed an appeal filed by the original complainant in a case under Section 138 of the Negotiable Instruments Act 1881.

The Madras High Court order whereby the proceedings were quashed under Section 482 of the Criminal Procedure Code 1973 (Cr.P.C.).

Factual Matrix

The appellant herein (original complainant) was engaged in the business of milk and milk products. The respondent was one of the partners of a Partnership Firm being run in the name of Sira Marketing Services. The firm used to purchase milk and milk products from the appellant/complainant on credit basis. The appellant had to recover an amount of Rs. 10,71,434.60/- from the partnership firm. 

The firm issued a cheque duly signed by the original accused No. 02 (partner/authorised signatory) in favour of the appellant for the amount of Rs. 10,00,000/ (Rs. Ten Lakh only) dated 05.05.2017. The cheque came to be dishonoured as there was no sufficient balance in the account maintained by the firm. 

No sooner, the bank intimated the appellant herein that the cheque could not be cleared due to insufficient funds than the appellant herein issued a statutory notice to the firm and the two partners of the firm. Despite service of notice to the firm as well as the two partners (accused persons) the amount was not paid to the appellant and therefore, the appellant was left with no other option but to file the complaint in the Judicial Magistrate under Section 141 read with 138 of the NI Act. 

High Court's View

The High Court quashed the proceedings against the respondent herein mainly on the ground that there was nothing to indicate as to how and in what manner the respondent at the relevant point of time was in charge and responsible for the conduct of the business of the firm. The High Court took the view that the complaint can be prosecuted as against the respondent herein only if the allegations made in the complaint fulfils the requirements of Section 141 of the NI Act. The High Court took the view that merely by reciting the words used under Section 141 of the NI Act in the complaint no vicarious liability can be fastened on the partner of the firm.

Appellant's Contentions

Advocate ER Kumar submitted that in the statutory notice issued to the respondent as well as in the body of the complaint, there are specific averments that the accused Nos. 02 and 03 respectively, being the partners of the partnership firms, are incharge and responsible for the dayto day affairs of the firm. He pointed out there are specific averments made in the complaint that the partners which include the respondent herein are regularly looking after and actively taking part in the day-to-day business of the firm.

It was further submitted that that if the substance of the allegation made in the complaint fulfil the requirements of Section 141 of the NI Act, the complaint is to proceed and is required to be tried with. The learned counsel vociferously argued that while construing a complaint the Court should not adopt a hypertechnical approach and quash the same.

Respondents' Contentions

Advocate Hari Priya Padmanabhan submitted that that mere bald averments in the complaint are not sufficient to fasten the vicarious liability on the partner of the firm as envisaged under Section 141 of the NI Act. 

Observations

The Court examined the original complaint and came to the conclusion that Accused No. 1 was a partnership firm and Accused Nos. 2 and 3 were partners who were responsible for the day-to-day affairs of the firm. 

Court observed that, "By virtue of the provisions of subsection (1) of Section 141, the guilt for the offence and the liability to be prosecuted and punished shall be extended to every person who, at the time the offence was committed, was in charge of and was responsible to the company for the conduct of its business; irrespective of whether such person is a director, manager, secretary or other officer of the company. It would be for such responsible person, in order to be exonerated in terms of the first proviso, to prove that the offence was committed without his knowledge or despite his due diligence."

It was noted that the burden upon the prosecution would be discharged under subsection (1) when a person was proved to be in charge of and responsible to the company in the conduct of its business and would shift upon the accused to prove that he was ignorant or diligent, if that be his defence; whereas under subsection (2) the prosecution would be required to allege and prove the consent, connivance or neglect and holding of the office by the accused.

It was further observed that, "Advertence to Sections 138 and Section 141 respectively of the NI Act shows that on the other elements of an offence under Section 138 being satisfied, the burden is on the Board of Directors or the officers in charge of the affairs of the company/partners of a firm to show that they were not liable to be convicted. The existence of any special circumstance that makes them not liable is something that is peculiarly within their knowledge and it is for them to establish at the trial to show that at the relevant time they were not in charge of the affairs of the company or the firm."

"Criminal liability is attracted only on those, who at the time of commission of the offence, were in charge of and were responsible for the conduct of the business of the firm. But vicarious criminal liability can be inferred against the partners of a firm when it is specifically averred in the complaint about the status of the partners ‘qua’ the firm. This would make them liable to face the prosecution but it does not lead to automatic conviction. Hence, they are not adversely prejudiced if they are eventually found to be not guilty, as a necessary consequence thereof would be acquittal," the Court noted.

Decision

The order of the High Court was, henceforth, quashed.