2025 (6) TMI 1160 - HC - Indian Laws

Dishonour of Cheque - authority of partner of a partnership firm without explicit authorization from the firm to issue statutory demand notice and file a criminal complaint for dishonour of a cheque or not - HELD THAT - The question as to whether the partnership is a legal person or not has been a matter of consideration for umpteen number of times before the courts of law - In C.I.T. Vs. R.M. Chidambaram Pillai and others 1976 (11) TMI 2 - SUPREME COURT it was held that The necessary inference from the premise that a partnership is only a collective of separate persons and not a legal person in itself leads to the further conclusion that the salary stipulated to be paid to a partner from the firm is in reality a mode of division of the firm s profits no person being his own servant in law since a contract of service postulates two different persons. Once the law on the said subject is crystallized that a partnership firm is not a legal entity separate and distinguished from his partner and only compendious description of individuals who compose the firm then the question which arises would be of implied authority of a partner on the face of the fact that he is the agent of the firm - A perusal of Section 19 of the Indian Partnership Act would reveal with relation to an implied authority for doing certain works there are certain exceptions according to which in absence of any usage or custom of trade to the contrary the partner is not empowered to act illustrations thereof being (a) to (h) of sub-section (2) of Section 19. A perusal of Section 19 of the Indian Partnership Act would reveal with relation to an implied authority for doing certain works there are certain exceptions according to which in absence of any usage or custom of trade to the contrary the partner is not empowered to act illustrations thereof being (a) to (h) of sub-section (2) of Section 19. Whether the complaint lodged by the opposite party no. 2 against the applicant confirms to the mandatory requirement under Section 141 of the NI Act? - HELD THAT - A birds eye view to para 1 of the complaint would reveal that averments have been made that the applicants herein are the Directors of the company and they are accountable and responsible for the day to day affairs of the company including financial and business dealings - there are specific recitals against the applicants which is as per requirement under Section 141 of the NI Act. Effect of imposition of moratorium under Section 14 of the IBC - HELD THAT - The cheques were drawn on 01.12.2022 it was presented on 22.02.2023 dishonored on 23.02.2023 notices were issued on 20.03.2023 served upon the applicants on 22.03.2023 and the complaint was filed on 21.04.2023 but moratorium was imposed under Section 14 of the IBC on 09.06.2023. Even otherwise in view of the authoritative judgments of the Hon ble Apex Court in P. Mohanraj 2021 (3) TMI 94 - SUPREME COURT Ajay Kumar Radheshyam Goenka 2023 (3) TMI 686 - SUPREME COURT Rakesh Bhanot 2025 (4) TMI 775 - SUPREME COURT the applicants being the Director of the body corporate are not entitled to any protection under Section 14 of the IBC and they have no right to forestall the proceedings under Section 138 of the NI Act. Conclusion - i) The complaint filed by the partner on behalf of the partnership firm is maintainable under Section 138 of the NI Act notwithstanding the absence of explicit authorization at the filing stage. ii) The complaint complies with Section 141 of the NI Act and the applicants as Directors can be proceeded against for the offence under Section 138. iii) The moratorium under Section 14 of the IBC does not bar continuation of criminal proceedings under Section 138/141 of the NI Act against Directors. iv) It is declined to quash the complaint or summoning order under inherent jurisdiction at the preliminary stage. This Court is of the firm opinion that the court below has not committed any jurisdictional infirmity so as to warrant interference in the present proceedings - Application dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) Whether a partner of a partnership firm, without explicit authorization from the firm, is competent under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) to issue statutory demand notice and file a criminal complaint for dishonour of a cheque drawn in the name of the partnership firm.

(b) Whether the complaint filed by a partner on behalf of the partnership firm satisfies the requirements under the Indian Partnership Act, 1932, particularly regarding implied authority and agency of partners.

(c) Whether the complaint under Section 138 of the NI Act complies with the mandatory averments required under Section 141 of the NI Act to implicate the Directors of the company in criminal proceedings.

(d) The effect of the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) on the continuation of criminal proceedings under Section 138 of the NI Act against the company and its Directors.

(e) The scope and exercise of the Court's inherent jurisdiction under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) or Section 528 of the BNSS in quashing proceedings initiated under Section 138 of the NI Act, especially at the summoning stage.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Competence of a partner to file complaint under Section 138 NI Act without explicit authorization

Relevant legal framework and precedents: Sections 2(a), 4, 11, 18, 19, and 22 of the Indian Partnership Act, 1932 define the nature of partnership, agency of partners, and implied authority. Sections 7, 8, 9, 138, 141, and 142 of the NI Act define drawer, drawee, payee, holder, holder in due course, and the procedure for prosecution under Section 138. The Apex Court in Bhupesh Rathod v. Dayashankar Prasad Chaurasia (2022) held that a partner of a firm in whose name a cheque is drawn is a holder in due course and competent to sue in his own name. Other relevant precedents include Abhishek Jain v. State of U.P. and Padmawati Finance v. Md. Yosuf Ali.

Court's interpretation and reasoning: The Court observed that a partnership firm is not a separate legal entity distinct from its partners but a compendious description of the individual partners. A partner is the agent of the firm with implied authority to bind the firm in the usual course of business under Sections 18 and 19 of the Partnership Act. The complaint filed by a partner in his own name on behalf of the partnership firm is maintainable even if there is no express authorization at the filing stage, as such defects are curable during trial.

The Court distinguished the present case from precedents relied upon by the applicants where the complainant was a stranger or lacked any authority. It held that the complainant being a partner and no objection from other partners regarding authorization supports the maintainability of the complaint.

Key evidence and findings: The cheque was drawn in the name of the partnership firm, and the complainant is a partner. No other partner objected to the complaint. The statutory demand notice was issued and served on the applicants.

Application of law to facts: The partner's implied authority and agency status under the Partnership Act empower him to file the complaint. The absence of explicit authorization at the initial stage is a curable defect and does not vitiate the complaint.

Treatment of competing arguments: The applicants argued that only the firm could file the complaint and the partner lacked authority without express authorization. The Court rejected this, relying on statutory provisions and binding precedents that recognize implied authority and agency of partners.

Conclusion: The complaint filed by the partner on behalf of the partnership firm is maintainable under Section 138 of the NI Act notwithstanding the absence of explicit authorization at the filing stage.

(b) Compliance with Section 141 of the NI Act regarding Directors' liability

Relevant legal framework and precedents: Section 141 of the NI Act imposes vicarious liability on persons in charge of and responsible to the company for the conduct of its business. The Apex Court in Ashok Shewakramani and Ashutosh Ashok Parasrampuriya clarified that the complaint must contain specific averments that the accused Directors were in charge and responsible at the time of the offence. Mere allegations of managing affairs or being Directors without such specific averments are insufficient.

Court's interpretation and reasoning: The Court examined the complaint's para 1, which specifically averred that the applicants were Directors responsible for the day-to-day affairs of the company, including financial and business dealings. The Court found these averments sufficient to satisfy Section 141's requirements at the summoning stage. The Court distinguished cases cited by applicants where such specific averments were lacking or where the accused were non-executive Directors.

Key evidence and findings: Complaint's averments that the applicants were Directors responsible for the company's conduct and business at the time of the cheque issuance and dishonour.

Application of law to facts: The complaint's averments meet the statutory threshold under Section 141 to implicate the Directors. This justifies issuance of summons against the applicants.

Treatment of competing arguments: Applicants contended that the averments were vague and insufficient. The Court rejected this, emphasizing the liberal approach at the summoning stage and the sufficiency of the complaint's allegations.

Conclusion: The complaint complies with Section 141 of the NI Act, and the applicants as Directors can be proceeded against for the offence under Section 138.

(c) Effect of moratorium under Section 14 of the IBC on criminal proceedings under Section 138 NI Act

Relevant legal framework and precedents: Section 14 of the IBC imposes a moratorium on legal proceedings against the corporate debtor during insolvency resolution. The Apex Court in P. Mohanraj, Ajay Kumar Radheshyam Goenka, and Rakesh Bhanot held that the moratorium applies only to the corporate debtor and not to its Directors or natural persons who can be prosecuted under Section 138/141 of the NI Act. The criminal liability of Directors continues notwithstanding the moratorium.

Court's interpretation and reasoning: The Court noted that the moratorium protects the company as a juristic person but does not extend to Directors. The criminal proceedings under Section 138 are distinct from civil claims and are aimed at penalizing dishonour of cheques. The Court rejected the applicants' contention that the moratorium bars the proceedings against them. It distinguished cases where moratorium was imposed before issuance of statutory notice, unlike the present case where the complaint and notice predated the moratorium.

Key evidence and findings: The cheques were dishonoured and notices issued before the moratorium was imposed on the company. The applicants are Directors facing personal criminal liability.

Application of law to facts: The moratorium under Section 14 of the IBC does not stay criminal proceedings against Directors under Section 138/141 of the NI Act. The proceedings against the applicants can continue.

Treatment of competing arguments: Applicants argued for stay of proceedings due to moratorium. The Court rejected this relying on binding Supreme Court precedents.

Conclusion: The moratorium under Section 14 of the IBC does not bar continuation of criminal proceedings under Section 138/141 of the NI Act against Directors.

(d) Scope of Court's inherent jurisdiction under Section 482 CrPC/Section 528 BNSS to quash proceedings under Section 138 NI Act

Relevant legal framework and precedents: The Supreme Court in Rathish Babu Unnikrishnan and Naresh Potteries emphasized that inherent powers should be exercised sparingly and not to scuttle fair investigation or prosecution. Quashing at the summoning stage is generally disfavored when disputed questions of fact exist. The statutory presumption under Section 139 of the NI Act requires trial courts to weigh evidence rather than quash complaints prematurely.

Court's interpretation and reasoning: The Court held that the revisional court did not err in refusing to quash the summoning order. The Court emphasized that the trial court is the proper forum to adjudicate disputed facts. The Court declined to interfere with the summoning order in exercise of inherent jurisdiction.

Key evidence and findings: The complaint disclosed a prima facie case; disputed facts exist requiring trial; statutory presumptions apply.

Application of law to facts: The Court found no jurisdictional infirmity in the summoning order and no ground for interference at the quashing stage.

Treatment of competing arguments: Applicants sought quashing on multiple legal grounds; the Court found these to be factual or curable defects better suited for trial.

Conclusion: The Court declined to quash the complaint or summoning order under inherent jurisdiction at the preliminary stage.

3. SIGNIFICANT HOLDINGS

"A partner of a partnership firm in whose name a cheque is drawn is the holder in due course and competent to file a complaint under Section 138 of the Negotiable Instruments Act even if there is no express authorization from the firm at the initial stage. Such defects are curable during trial."

"A complaint under Section 138 of the NI Act must contain specific averments under Section 141 that the accused Directors were in charge of and responsible for the conduct of the company's business at the time of the offence. Mere allegations of managing affairs or being Directors without such specific averments are insufficient, but the complaint in the present case satisfies this requirement."

"The moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code applies only to the corporate debtor and does not extend protection to Directors or natural persons from criminal prosecution under Section 138/141 of the Negotiable Instruments Act."

"The inherent powers of the Court under Section 482 CrPC or Section 528 BNSS to quash proceedings under Section 138 of the NI Act should be exercised sparingly and not at the summoning stage where disputed facts exist and statutory presumptions apply. The trial court is the appropriate forum to adjudicate such disputes."

"The complaint filed by the complainant-partner on behalf of the partnership firm is maintainable and the summoning order against the applicants under Section 138 of the NI Act is upheld."