Stretching the Statute? Supreme Court’s Bold Take on Section 138 of the Negotiable Instruments Act, 1881

Introduction

In a significant judgment delivered on 14-7-2025, the Supreme Court in Dhanasingh Prabhu v. Chandrasekar¹ has departed from established precedent regarding prosecution of partnership firms and their partners under Section 141² of the Negotiable Instruments Act, 1881³ (NI Act). The two-Judge Bench of Justices B.V. Nagarathna and Satish Chandra Sharma has held that complaints under Section 138⁴ of the NI Act are maintainable even when only partners are arraigned as accused and the partnership firm itself is not made an accused party.

Factual background

The case arose from a business transaction where the appellant had advanced a loan of Rs 21 lakhs to respondents, who were partners in a partnership firm named Mouriya Coirs, engaged in manufacturing coir products. To discharge the debt, Respondent 1 issued a cheque for a sum of Rs 21 lakhs from the partnership firm’s account. The cheque was dishonoured due to the account being frozen.

Following the dishonour, the appellant issued a statutory notice under Section 138 to both partners individually but not to the partnership firm. Subsequently, a complaint was filed against both partners, again without arraigning the partnership firm as an accused. The Madras High Court quashed the complaint on the ground that the partnership firm should have been issued notice and arraigned as an accused, citing non-compliance with Section 141 of the NI Act.

Issues considered

The principal question before the Supreme Court was whether a complaint under Section 138 of the NI Act is maintainable against the partners alone when the partnership firm is not named as an accused?

The Supreme Court’s reasoning

(1) Distinction between partnership firms and companies

The Supreme Court extensively analysed the fundamental differences between partnership firms and companies. At the outset, the Court emphasised that unlike companies, which are separate juristic entities with perpetual succession and limited liability, partnership firms are merely “compendious terms” for their partners.

The Court relied on Section 4⁵ of the Partnership Act, 1932⁶ and observed that a partnership is defined as “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”. The Court also noted that persons who enter into partnership are individually called “partners” and collectively “a firm”.

(2) Legal status of partnership firms

The Court relied on several precedents such as Aron Salomon (Pauper) v. A. Salomon & Co. Ltd.⁷, Bacha F. Guzdar v. CIT⁸, Dulichand Laxminarayan v. CIT⁹ and CIT v. R.M. Chidambaram Pillai¹⁰ and observed that a partnership firm, unlike a company registered under the Companies Act¹¹, does not possess a separate legal personality and the firm’s name is only a compendious reference for describing its partners. The Court used this principle as a benchmark to demonstrate why partnership firms should be treated differently from companies under Section 141 of the NI Act.

Building upon this principle, the Court observed that a partnership name is merely a compendious method of describing the partners themselves. It held that a reference to the partners, in their capacity as members of the firm, is sufficient to impute liability, since the firm and its partners are not distinct legal entities. In contrast, the Court noted, directors of a company incur vicarious liability only through the company, which bears primary liability due to its separate juristic status. A partnership, however, has no independent corporate existence and derives its legal character solely from its partners. Consequently, partners are co-owners of the firm’s property, unlike shareholders in a company, who are not owners of corporate assets.

(3) Joint and several liability of partners

The Court explained that under Sections 25¹² and 26¹³ of the Partnership Act, 1932, partners are jointly and severally liable for all acts of the firm. Since a partnership firm is not a legal entity but only a collective name for partners, any liability of the firm has the same effect as liability against the partners. The Court distinguished this from companies where shareholders have limited liability.

(4) Application to Section 141 of the NI Act

The Court held that Section 141 of the NI Act, which establishes vicarious liability for officers of a company, must be interpreted differently when extended to partnership firms through the inclusive definition provided in Explanation (a). It reasoned that Section 141 operates through a deeming provision wherein the term “company” includes a partnership firm. However, unlike a company, a partnership firm has no separate juristic identity independent of its partners. As such, partners are not vicariously liable in the manner of company directors; rather, they are directly liable along with the firm. The Court clarified that this liability is joint and several in nature, not vicarious.

(5) Distinguished precedents

In its analysis, the Court addressed the decisions in Dilip Hariramani v. Bank of Baroda¹⁴ and Aneeta Hada v. Godfather Travels & Tours (P) Ltd.¹⁵, both of which had previously emphasised that the principal offender must be arraigned as an accused before vicarious liability can be imposed on others. In Aneeta Hada¹⁶, a three-Judge Bench held that when an offence is committed by a company, it is imperative to prosecute the company itself, as the liability of its directors or officers is purely vicarious under Section 141 of the NI Act. Similarly, in Dilip Hariramani¹⁷, the Court quashed the conviction of a partner on the ground that the partnership firm had not been made an accused, and therefore, vicarious liability could not attach to the partner in isolation.

However, the Court in Dhanasingh Prabhu¹⁸ clarified that these precedents are not applicable in the context of partnership firms, due to a fundamental difference in legal character between a company and a partnership. Unlike a company, which is a distinct juristic entity separate from its directors and shareholders, a partnership firm has no independent legal personality and exists merely as a collective designation of its partners. Thus, the Court reasoned, the concept of vicarious liability — central to the reasoning in Aneeta Hada¹⁹ and Dilip Hariramani²⁰ does not strictly apply to partnerships.

Crucially, in Dhanasingh Prabhu²¹, the complainant had issued statutory notices to both partners, and the complaint directly implicated them for issuing a dishonoured cheque on behalf of the firm. The Court held that where partners are treated as principal offenders, and their liability is joint and several, not vicarious, the non-arraignment of the partnership firm does not invalidate the complaint. In such cases, the partnership firm is effectively represented through its partners, and notice to them can be deemed notice to the firm.

(6) Procedural flexibility

Despite everything, the Court granted permission to the complainant to arraign the partnership firm as an accused while holding that the complaint was maintainable even without the firm being initially named. The Court reasoned that: (i) notice to partners could be construed as notice to the partnership firm; (ii) even without making the firm an accused, partners being accused would be sufficient; and (iii) the defect, if any, was not significant or incurable.

Legal implications

(1) Maintainability of the complaint

The Supreme Court’s decision²² establishes that a complaint under Section 138 of the NI Act is legally maintainable even in cases where the partnership firm itself is not arraigned as an accused, provided certain conditions are met. Specifically, the Court held that if only the individual partners are named as accused persons, and statutory notice of demand is served on those partners, even if the partnership firm is not independently issued notice, the complaint does not become defective. This holds true particularly when the dishonoured cheque was issued by the partnership firm, as in such cases, the liability for the dishonour attaches directly to the partners, who are jointly and severally responsible for the firm’s obligations. The Court clarified that since a partnership firm has no separate legal personality independent of its partners, initiating proceedings against the partners alone is sufficient to sustain the prosecution.

(2) Requirements to be kept in mind while issuing notices

The Court held that notice to partners satisfies the statutory requirement under Section 138, as notice to partners can be construed as notice to the firm, given that the firm has no separate identity from its partners.

(3) Prosecution strategy

The judgment provides flexibility to complainants in deciding prosecution strategy against partnership firms, allowing them to proceed against either: (i) the firm and its partners; or (ii) only the partners (with permission to add the firm later).

Conclusion

In its conclusive findings, the Supreme Court held²³ that a complaint under Section 138 of the NI Act remains valid and maintainable even if only the partners of a firm are named as accused, without the firm itself being formally arraigned. It further clarified that serving statutory notice on the partners alone is sufficient to meet the legal requirements under Section 138, as such notice is deemed to be notice to the firm. Recognising the realities of commercial litigation, the Court also emphasised that procedural flexibility must be allowed, and courts should permit the complainant to implead the partnership firm at a later stage if necessary.

Importantly, the judgment distinguished the precedent set in Aneeta Hada²⁴, reaffirming that the principles relating to vicarious liability established in that case apply exclusively to companies, which are separate juristic entities. In contrast, partnership firms, lacking such separate legal personality, operate through their partners, whose liability is not vicarious but direct, joint, and several in nature.

Critical assessment

The Dhanasingh Prabhu²⁵ judgment, while attempting to address practical concerns about partnership firm prosecutions, creates more problems than it solves. Its reasoning contradicts established Supreme Court precedents, undermines statutory requirements, and creates dangerous precedents for selective prosecution.

First, by effectively side-stepping the requirement of naming the partnership firm, which issues the cheque and is the drawer, it blurs procedural clarity under Section 138. Permitting prosecution without arraigning the drawer stretches the language of the statute beyond its plain terms.

Second, the Court seems to dilute the rationale behind requiring notice to the drawer of the cheque. Even if partners are liable, the firm was the drawer. Not sending notice to the entity that signed the cheque, however artificial it may be, undermines the statutory mandate of notice as a condition precedent.

Lastly, the ruling risks creating interpretative dissonance between the liability of companies and partnerships. While it is true that partnership firms and companies differ in structure, the decision introduces a dual standard under Section 141 of the NI Act. This can complicate compliance expectations and raise constitutional concerns about uniformity in criminal liability for similar.

In conclusion, while the judgment is pragmatic and aligns with the commercial realities of partnership structures in India, it may have overshot the statutory boundaries of the NI Act.