Supreme Court Clarifies Partner Liability Under Section 138 NI Act: Firm Need Not Be Arraigned

Introduction

The Supreme Court of India, in a landmark judgment delivered on July 14, 2025, in Dhanasingh Prabhu v. Chandrasekar & Another, clarified the scope of partner liability under Section 138 NI Act. The ruling confirms that individual partners can be prosecuted for cheque dishonour even if the partnership firm is not named as an accused, strengthening the principles of joint and several liability in partnership law.

This decision resolves a significant procedural question that has been the subject of conflicting interpretations across various High Courts and provides essential guidance for practitioners dealing with cheque dishonour cases involving partnership firms. The judgment clarifies the distinction between partnership firms and companies in the context of criminal liability and establishes important precedents for the interpretation of Section 141 of the Negotiable Instruments Act.

Factual Background and Legal Context

Case Genesis and Procedural History

The appellant, Dhanasingh Prabhu, filed a complaint under Section 138 of the Negotiable Instruments Act against the respondents, Chandrasekar and another, regarding the dishonour of a cheque worth Rs. 21 lakh. The cheque was issued in the name of a partnership firm called ‘Mouriya Coirs’ to repay a debt. Crucially, while the cheque was issued on behalf of the partnership firm, the statutory notice under Section 138 NI Act was sent only to the individual partners, and the firm itself was neither issued a notice nor made a party to the complaint.

The respondents challenged the maintainability of the complaint, arguing that the partnership firm should have been formally arraigned as an accused and issued a statutory notice for the proceedings to be valid. This contention was based on established jurisprudence requiring proper compliance with the procedural requirements of Section 138 NI Act, particularly the mandatory issuance of statutory notice to the drawer of the dishonoured cheque.

Madras High Court Decision

The Madras High Court, in its judgment dated February 26, 2024, accepted the respondents’ arguments and quashed the complaint filed under Section 138 NI Act. The High Court held that since no statutory notice was issued to the partnership firm ‘Mouriya Coirs’ and the firm was not arraigned as an accused in the complaint, the rigours of Section 141 of the Negotiable Instruments Act were not complied with, rendering the complaint non-maintainable against the partners.

The High Court’s reasoning was based on a strict interpretation of the procedural requirements under Section 138 and Section 141, treating the partnership firm as a distinct entity that must be formally included in the proceedings for the complaint to be maintainable against its partners. This approach reflected the court’s adherence to technical compliance with statutory notice requirements.

Supreme Court Intervention

Aggrieved by the High Court’s decision, the appellant approached the Supreme Court, challenging the interpretation that would render complaints non-maintainable merely due to the absence of formal arraignment of the partnership firm. The Supreme Court granted leave to appeal and proceeded to examine the fundamental legal principles governing partnership liability under Section 138 NI Act

Legal Framework: Partnership Law and Criminal Liability

Partnership Act, 1932 – Fundamental Principles

The legal foundation for understanding partnership firm liability lies in the Partnership Act, 1932, which establishes the fundamental characteristics of partnerships and the relationship between firms and their partners. Section 4 of the Partnership Act clearly establishes that “Partnership is 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” [2].

Crucially, the Partnership Act does not grant partnership firms separate legal personality independent of their partners. Unlike corporations, partnership firms are not distinct legal entities but represent collective arrangements between individuals who agree to conduct business together. This fundamental principle has far-reaching implications for criminal liability and procedural requirements under various statutes.

Section 18 of the Partnership Act establishes that “Partners are agents of the firm and also of each other,” creating a framework of mutual agency and shared responsibility that extends beyond mere contractual obligations. This agency relationship forms the basis for joint and several liability principles that govern partnership operations and legal consequences.

Section 138 and 141 of the NI Act

Section 138 of the Negotiable Instruments Act, 1881, creates criminal liability for dishonour of cheques, stating: “Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid… such person shall be deemed to have committed an offence” [3].

Section 141 extends this liability to companies and firms, providing: “If the person committing an offence under section 138 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” [4].

The Explanation to Section 141 specifically states: “(a) ‘company’ means any body corporate and includes a firm or other association of individuals; and (b) ‘director’, in relation to a firm, means a partner in the firm.” This explanation brings partnership firms within the ambit of Section 141 while recognizing the unique nature of partnerships.

Joint and Several Liability Principles

The concept of joint and several liability is fundamental to partnership law and distinguishes partnerships from other business entities. Under this principle, each partner is individually liable for the entire amount of partnership debts and obligations, while also being collectively liable with other partners and the firm itself.

This liability structure means that creditors can pursue recovery from any individual partner, all partners collectively, or the partnership firm, without being required to exhaust remedies against one before proceeding against another. The practical effect is that partners cannot escape liability by arguing that they should not be pursued individually when the firm has not been formally included in proceedings.

Supreme Court’s Legal Analysis and Reasoning

Distinction Between Partnership Firms and Companies

The Supreme Court’s analysis began with a fundamental examination of the legal distinctions between partnership firms and companies, particularly in the context of criminal liability under the Negotiable Instruments Act. The Court emphasized that “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 distinction is crucial because it affects how criminal liability attaches and how procedural requirements should be interpreted. The Court noted 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 Court further elaborated: “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.” This understanding forms the foundation for the Court’s conclusion that procedural requirements can be satisfied through actions directed at partners, even when the firm is not formally included.

Joint and Several Liability under Section 138 NI Act

The Supreme Court provided comprehensive analysis of how joint and several liability principles apply in the context of Section 138 proceedings. The Court stated: “If a partnership firm is liable for the offence under Section 138 NI Act, it would imply that the liability would automatically extend to the partners of the partnership firm jointly and severally.”

This automatic extension of liability eliminates the need for separate proceedings against the firm and its partners, as the liability is inherent and indivisible. The Court emphasized: “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.”

The distinction between direct liability and vicarious liability is significant because it affects both the procedural requirements and the substantive legal consequences. While company directors may face vicarious liability under Section 141, partners face direct personal liability that coexists with firm liability.

Interpretation of Section 141 Requirements

The Supreme Court addressed the argument that Section 141 requires both the firm and partners to be formally arraigned for proceedings to be maintainable. The Court rejected this interpretation, stating: “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 Court found that “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.”

This interpretation recognizes that Section 141 creates a unified liability framework rather than requiring separate procedural compliance for each potentially liable party.

Procedural Flexibility and Practical Justice

The Supreme Court demonstrated a pragmatic approach to procedural requirements, emphasizing that technical defects should not defeat substantial justice when the underlying legal principles support the proceedings. The Court stated: “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 Court suggested alternative approaches that could cure any procedural defects: “Rather, 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, notice to the partners/accused could have been construed as notice to the partnership firm also.”

This flexible approach reflects the Court’s commitment to ensuring that procedural technicalities do not undermine the substantive goals of the Negotiable Instruments Act, which is designed to provide effective remedies for victims of cheque dishonour.

Constitutional and Policy Considerations

Access to Justice and Procedural Fairness

The Supreme Court’s decision reflects broader constitutional principles related to access to justice and procedural fairness. Article 21 of the Constitution guarantees the right to life and personal liberty, which has been interpreted to include the right to fair and reasonable legal procedures that do not create unnecessary barriers to justice.

By rejecting overly technical interpretations of procedural requirements, the Court has ensured that complainants are not denied justice due to formalistic compliance issues that do not affect the substantive merits of their cases. This approach aligns with the constitutional mandate to provide accessible and effective legal remedies.

Legislative Intent and Statutory Interpretation

The Court’s analysis reflects careful consideration of legislative intent behind the Negotiable Instruments Act and the Partnership Act. The Court recognized that “the Negotiable Instruments Act was enacted to provide effective remedies for victims of cheque dishonour” and that overly restrictive interpretations of procedural requirements could undermine this objective.

The Court applied principles of harmonious construction, ensuring that the Negotiable Instruments Act and Partnership Act are interpreted in a manner that gives effect to both statutes’ underlying purposes. This approach prevents conflicts between different legal frameworks and ensures coherent application of legal principles.

Economic Efficiency and Commercial Certainty

The decision has important implications for commercial transactions and economic efficiency. By clarifying that complaints can be maintained against partners without formal firm arraignment, the Court has reduced procedural uncertainty that could otherwise complicate debt recovery and commercial dispute resolution.

This clarity benefits both creditors and debtors by providing predictable legal frameworks for resolving payment disputes. Commercial parties can now structure their transactions and legal strategies with greater confidence regarding the procedural requirements for Section 138 proceedings.

Implications for Legal Practice and Commercial Transactions

Drafting and Documentation Considerations

Legal practitioners must now consider the implications of this judgment for drafting commercial agreements and documenting business relationships involving partnership firms. While the decision provides greater procedural flexibility, it also emphasizes the importance of clear documentation regarding partnership structures and individual partner responsibilities.

The judgment suggests that statutory notices can be effectively served on partners without separate service on the firm, but practitioners may still prefer to include both the firm and partners as recipients to avoid any potential challenges. This approach provides additional protection while taking advantage of the procedural flexibility recognized by the Supreme Court.

Litigation Strategy and Case Management in Section 138 proceedings

The decision affects litigation strategy in Section 138 proceedings involving partnership firms. Complainants now have greater flexibility in structuring their cases and are not required to make complex determinations about firm registration status or formal entity recognition before filing complaints.

However, the judgment also suggests that courts may exercise discretion to allow firms to be added as parties during proceedings, which means that defense strategies must account for potential modifications to the complaint structure. This flexibility cuts both ways, providing opportunities for both complainants and defendants to adjust their positions as cases develop.

Risk Assessment and Commercial Decision-Making

Commercial entities dealing with partnership firms can now make more informed risk assessments based on clearer understanding of liability principles. The joint and several liability framework means that creditors can pursue recovery from any partner individually, regardless of whether formal proceedings have been initiated against the firm itself.

This understanding may influence commercial decision-making regarding credit terms, security requirements, and due diligence procedures when dealing with partnership firms. The decision provides greater certainty about liability enforcement mechanisms while emphasizing the personal nature of partner liability.

Comparative Analysis with Corporate Liability

Aneeta Hada Precedent and Distinguishing Factors

The Supreme Court specifically distinguished the present case from its earlier decision in Aneeta Hada v. Godfather Travels & Tours (P) Ltd. (2012) 5 SCC 661, which established that company directors cannot be prosecuted under Section 138 without the company being arraigned as an accused [5].

The Court explained that this distinction is justified because “directors have vicarious liability, whereas partners have direct and personal liability under partnership law.” This fundamental difference in the nature of liability justifies different procedural approaches for companies versus partnership firms.

The Court emphasized that corporate liability involves “separate juristic entities” where directors’ liability is derivative of corporate wrongdoing, while partnership liability involves direct personal obligation that coexists with collective firm responsibility.

Vicarious vs. Direct Liability Framework

The judgment clarifies the important distinction between vicarious liability (applicable to corporate directors) and direct liability (applicable to partners). This distinction has procedural and substantive implications that affect how Section 138 proceedings should be structured and conducted.

For corporate entities, the requirement to arraign the company as an accused ensures that the primary responsible party is included in proceedings before pursuing vicarious liability against directors. For partnerships, the direct liability of partners means that they are primary responsible parties regardless of whether the firm is formally included.

This framework provides coherent and principled approach to different business structures while recognizing their distinct legal characteristics and liability frameworks.

Future Implications and Legal Development

Harmonization of Commercial Law

The Supreme Court’s decision contributes to the ongoing harmonization of commercial law principles across different business entities and legal frameworks. By providing clear guidance on partnership liability under the Negotiable Instruments Act, the Court has reduced conflicts between different legal regimes and provided greater coherence in commercial dispute resolution.

Future legislative developments may build upon this clarification to provide even more comprehensive frameworks for addressing commercial liability across different entity types. The decision provides a foundation for continued development of commercial law that recognizes both business flexibility and creditor protection.

Impact on Alternative Business Structures

The decision may influence how alternative business structures, such as Limited Liability Partnerships (LLPs) and other hybrid entities, are treated under commercial law. The Court’s emphasis on the underlying economic reality of business relationships rather than formal entity structures suggests that future interpretations may focus on substance over form.

This approach could lead to more nuanced treatment of emerging business structures that combine elements of partnerships and corporations, ensuring that liability frameworks remain appropriate for evolving commercial practices.

Technological and Digital Commerce Considerations

As commercial transactions increasingly move to digital platforms and involve complex technological intermediation, the principles established in this judgment provide important guidance for determining liability in digital commerce contexts. The focus on direct economic relationships and practical business control may be particularly relevant for platform-based businesses and digital intermediaries.

The decision’s emphasis on substance over technical compliance may also be relevant for addressing liability issues in emerging technologies such as blockchain-based transactions and smart contracts, where traditional entity concepts may require adaptation.

Conclusion

The Supreme Court’s decision in Dhanasingh Prabhu v. Chandrasekar represents a significant clarification of partnership liability principles under the Negotiable Instruments Act. By establishing that complaints under Section 138 are maintainable against partners without formal firm arraignment, the Court has resolved important procedural uncertainties while reaffirming fundamental principles of partnership law.

The judgment’s emphasis on joint and several liability reflects a sophisticated understanding of partnership law principles and their interaction with criminal liability frameworks. The Court has successfully balanced procedural clarity with substantive justice, ensuring that technical requirements do not defeat legitimate creditor rights while maintaining appropriate protections for all parties.

The decision provides valuable guidance for legal practitioners, commercial entities, and courts handling cheque dishonour cases involving partnership firms. By clarifying the scope of partner liability under Section 138 NI Act, the Supreme Court has paved the way for more efficient and predictable resolution of such disputes, while upholding the integrity of the legal framework.

Most importantly, the judgment demonstrates the Supreme Court’s commitment to principled legal interpretation that serves both commercial efficiency and procedural fairness. By grounding its decision in fundamental partnership law principles while addressing practical commercial needs, the Court has provided a framework that should serve the legal system well as commercial practices continue to evolve.

The decision’s impact extends beyond immediate procedural clarifications to contribute to the broader development of commercial law principles that recognize the diversity of business structures while maintaining coherent liability frameworks. This contribution to jurisprudential development ensures that the legal system remains responsive to commercial needs while preserving essential protections for all stakeholders in the commercial ecosystem.

References

[1] Dhanasingh Prabhu v. Chandrasekar & Another, Supreme Court Judgment dated July 14, 2025. 

[2] The Partnership Act, 1932, Section 4. Available at: https://www.indiacode.nic.in/bitstream/123456789/15327/1/negotiable_instruments_act,_1881.pdf 

[3] Section 138, The Negotiable Instruments Act, 1881. Available at: https://indiankanoon.org/doc/686130/ 

[4] Section 141, The Negotiable Instruments Act, 1881. Available at: https://indiankanoon.org/doc/686130/ 

[5] Supreme Court Clarifies Law on Liability of Persons in Charge of Company/Firm. Available at: https://www.lexology.com/library/detail.aspx?g=e0114cbf-f6b0-4311-93b6-98f800a2541d 

[6] Partnership Firm Liability Under Negotiable Instruments Act Analysis. Available at: https://www.scconline.com/blog/post/2021/07/20/section-141-ni-act/ 

Written and Authorized by Dhrutika Barad