Case BriefsSupreme Court

Supreme Court: Explaining the law on vicarious liability under the Negotiable Instruments Act, 1881, the bench of Ajay Rastogi and Sanjiv Khanna*, JJ has held that while Section 141 of the NI Act extends vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of Section 141 has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished, such vicarious liability arises only when the company or firm commits the offence as the primary offender.

The Court explained that the provisions of Section 141 NI Act impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable.

Sub-section (2) to Section 141 of the NI Act does not state that the persons enumerated, which can include an officer of the company, can be prosecuted and punished merely because of their status or position as a director, manager, secretary or any other officer, unless the offence in question was committed with their consent or connivance or is attributable to any neglect on their part. The onus under sub-section (2) to Section 141 of the NI Act is on the prosecution and not on the person being prosecuted.

It was further observed that the Partnership Act, 1932 creates civil liability. Further, the guarantor’s liability under the Contract Act, 1872 is a civil liability. The Partner may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability.

“Vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day-to-day business of the company or firm. Vicarious liability under sub-section (2) to Section 141 of the NI Act can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed. Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company.”

In the case at hand, even the Bank of Baroda had admitted that the appellant had not issued any of the three cheques, which had been dishonoured, in his personal capacity or otherwise as a partner. Hence, in the absence of any evidence led by the prosecution to show and establish that the appellant was in charge of and responsible for the conduct of the affairs of the firm, the conviction of the appellant had to be set aside.

“The appellant cannot be convicted merely because he was a partner of the firm which had taken the loan or that he stood as a guarantor for such a loan.”

[Dilip Hariramani v. Bank of Baroda, 2022 SCC OnLine SC 579, decided on 09.05.2022]


*Judgment by: Justice Sanjiv Khanna

Tis-hazari
Case BriefsDistrict Court

Tis Hazari Courts, New Delhi: Devanshu Sajlan, MM NI Act-05, while noting the ingredients of Section 138 of the Negotiable Instruments Act, 1881 acquitted a person charged for offence punishable under Section 138 NI Act.

Factual Matrix

Present complaint was filed under Section 138 of the Negotiable Instruments Act, 1881.

Complainant had granted a friendly loan of Rs 21,00,000 to the accused for two months for some urgent need of the accused.

To discharge the legal liability, the accused issued two cheques in favour of the complainant firm, but the same were returned by the bank as no balance was available in the account. Thereafter, Complainant sent a legal notice but the accused allegedly failed to pay the cheque amount and hence, the complainant filed the present complaint.

Accused denied having taken a loan of Rs 21,00,000 from the complainant and instead stated that he took a loan of Rs 5,00,000 and had already paid the same. He added that he had given three blank signed cheques as security cheques which were misused by the complainant.

Discussion

In the present matter, the complainant proved the original cheques that the accused had not disputed as being drawn on the account of the accused.

Court stated that giving a blank signed cheque does not erase the liability under the NI Act. If a signed blank cheque is voluntarily presented to a payee, towards some payment, the payee may subsequently fill up the amount and other particulars (Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197, ¶ 34).). The onus would still be on the accused to prove that the cheque was not in discharge of a debt or liability.

Legal Notice

It is settled law that an accused who claims that she/he did not receive the legal notice, can, within 15 days of receipt of summons from the court, make payment of the cheque amount, and an accused who does not make such payment cannot contend that there was no proper service of notice as required under Section 138, by ignoring statutory presumption to the contrary under Section 27 of the General Clauses Act and Section 114 of the Evidence Act [C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555).

Maintainability | Complainant is an unregistered partnership firm

It was contended that the present complaint was barred under Section 69(2) of the Indian Partnership Act. The firm was unregistered and hence the complaint was barred under the stated section.

A simpliciter reading of Section 69(2) would show that it is intended to apply to only suits, and that it would have no application to a criminal complaint.

Hence, the bar imposed on unregistered firms under Section 69(2) of the Indian Partnership Act does not apply to a criminal complaint under Section 138 NI Act.

Non-Existence of Debt

Complainant is required to prove that the cheque in question was drawn by the drawer for discharging a legally enforceable debt.

Court stated that as per the NI Act, once the accused admits signature in the cheque in question, certain presumptions are drawn, which result in shifting of onus on the accused and in the present matter, the issuance of cheques was not denied.

The combined effect of Section 118(a) NI Act and Section 139 of the NI Act is that a presumption exists that the cheque was drawn for consideration and given by the accused of the discharge of debt or other liability.

Rebuttal

  • Misuse of the security cheque

Bench stated that it is immaterial whether the cheque had been filled by the complainant once the cheque has been admitted being duly signed by the drawer-accused.

  • Complainant did not have the financial capacity to grant the alleged loan

It is a settled position of law that in case of cash transaction, showcasing that complainant did not have the adequate financial capacity to lend money to the accused amounts to a probable defense and can help in rebutting the presumption that is accrued to the benefit of the complainant in cheque dishonor cases.

In Basalingappa v. Mudibasappa, (2019) 5 SCC 418, the Supreme Court has observed as follows:

During his cross-examination, when financial capacity to pay Rs. 6 lakhs to the accused was questioned, there was no satisfactory reply given by the complainant. The evidence on record, thus, is a probable defence on behalf of the accused, which shifted the burden on the complainant to prove his financial capacity and other facts.

(emphasis added)

Hence, the Court stated that in cases in which the underlying debt transaction is a cash transaction, the accused can raise a probable defense by questioning the financial capacity of the complainant, and once the said question is raised, the onus shifts on the complainant to prove his financial capacity.

Bench on perusal of the record of the present case, agreed with the submission of the counsel of the accused, since the record created adequate doubts over the financial capacity of the complainant to advance the loan in question.

Conclusion

Hence, Court opined that the complainant failed to establish that it had the financial capacity to advance a loan of Rs 21,00,000 to the accused.

Therefore, accused successfully rebutted the presumption under Section 139 NI Act and the complainant failed to discharge the shifted onus.

“…even if the cheque presented by the complainant was returned unpaid by the bank, the complainant cannot prosecute the accused, as the requirement of the existence of legal liability has not been satisfied in the present case, since the accused has been able to establish a probable defence by creating a credible doubt over the existence of the alleged loan transaction.”

Concluding the matter, Bench held that complainant failed to prove the case beyond a reasonable doubt, hence the accused was acquitted from the charge of offence punishable under Section 138 of the NI Act. [S.S. Auto Gallery v. Vaneet Singh, 21636 of 2016, decided on 9-10-2021]


Advocates before the Court:

Manjeet Singh, counsel for the complainant.

D.K Ahuja, for the accused.

Kerala High Court
Case BriefsHigh Courts

Kerala High Court: N.Nagaresh, J., pronounced a landmark judgment regarding right to practice of Chartered Accountants. The Bench held,

“The decision of ICAI not to recognize and record the retirement of the petitioner from ‘M/s. R. Kumar and Associates’ will therefore cause unnecessary and unwarranted hindrance to the professional advancement of the petitioner. It will offend the fundamental right of the petitioner to practice a profession freely, guaranteed to him under Article 19(1)(g) of the Constitution of India.”

The petitioner, a registered Chartered Accountant was aggrieved by the refusal of the Institute of Chartered Accountants of India (ICAI) to register his sole proprietorship on its website. The grievance of the petitioner was that he was the only working partner of ‘R Menon & Associates’ which was a partnership at will, though the petitioner had sent an application to ICAI to record the dissolution of the firm and to delete his name from the records pertaining to the said firm in all capacities, it had not been recorded due to want of confirmation from other Partners, namely respondent 2 and respondent 3.

Additionally, the petitioner had proposed to register “Joshi John & Co.” as a sole proprietorship. Though with the interference of the Court, the petitioner was allowed to submit Form-18 for the registration of new firm, since the name of the dissolved Firm still exists in the records of ICAI, he was denied the right to apply for Multi Purpose Empanelment to obtain audit assignments of Banks and Public Sector Undertakings.

Stand Taken by ICAI

ICAI asserted that that when an activity of dissolution of a Partnership Firm is pending, another activity of registration of a Proprietary Firm cannot be initiated. ICAI further submitted that in view of Section 27(1) of the Chartered Accountants Act, 1949, where a Chartered Accountant in practice or a Firm, has more than one office in India, each one of such offices shall be in the separate charge of a member of the Institute of Section 27(1) of the Act and of the Regulation 187(1), the petitioner cannot register his sole proprietorship in the self-service portal at a different address unless he is relieved as in-charge of the Head Office of the Firm.

To reject the petitioner’s request for dissolution of firm ICAI relied on 165th meeting of the Institute held during 24th – 26th November, 1993, wherein it had been laid down that:

“In case of intimation of existence of dispute between/among partners received from the firm/other partners a suitable note would be kept in the records of the Institute and retirement will not be noted; and

The fact that there was dispute among the partners of a firm would also be intimated to the C.&A.G./RBI while furnishing the particulars of the firm for empanelment of bank/C.&A.G. audit.”

Findings of the Court

The issue before the Court was when a partnership firm of Chartered Accountants is dissolved or when one of the partners retires, can the Council refuse to recognize the dissolution or retirement, in the absence of unanimous approval thereof by all existing partners? The Bench stated that the actions of ICAI were such that the petitioner would either have to wait till the other partners agree either to the dissolution of the Firm or to the retirement of the petitioner from the Firm, in order to come out of the earlier partnership.

Whether consent of other partners required for dissolution of a Partnership at will?

The Bench observed that the Scheme and provisions of the CA Act, 1949 is not intended to register the partnerships of CAs or regulate inter se relations or disputes between partners. The Regulation 190 of CAs Regulations, 1993 is intended only to regulate the Trade name or Firm name of Chartered Accountants. Hence, registration and regulation of a partnership Firm of CAs would be governed by the Indian Partnership Act, 1932. It was not disputed that ‘M/s. R. Menon and Associates’ was a partnership at will. The Court expressed,

Section 43 of the Partnership Act, 1932 provides that when a partnership is ‘at will’, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The Firm is dissolved as from the date mentioned in the notice and if no date is so mentioned, as from the date of communication of the notice.”

According to the dissolution notice sent by the petitioner the date of dissolution mentioned therein was 20.12.2019. Therefore, as per Section 43 of the Partnership Act, the Firm ‘M/s. R. Menon and Associates’ should ordinarily be treated as dissolved from that date. Similarly, section 32(1)(c) of the Partnership Act, 1932 provides that a partner may retire, where the partnership is at will, by giving notice in writing to all other partners of his intention to retire. The petitioner had given notice of his retirement to respondents 2 and 3, thus, the petitioner stands retired from the partnership namely ‘R. Menon and Associates’.

Hence, ICAI could not deny to recognize such retirement. The forcible continuance of the petitioner, as a partner of a Firm which was loaded with partnership disputes, has civil consequences also on the petitioner. As per the general decisions taken by the Council, the Council had to communicate the existence of disputes among partners to C & A.G. and RBI, while furnishing the particulars of a Firm for empanelment of Bank/C&AG audits. Such recording and communication will affect the chances of the petitioner to get audit assignments. Therefore, the decision of ICAI not to recognize and record the retirement of the petitioner from ‘M/s. R. Kumar and Associates’ will cause unnecessary and unwarranted hindrance to the professional advancement of the petitioner and will offend the fundamental right of the petitioner to practice a profession freely, guaranteed to him under Article 19(1)(g) of the Constitution. The petitioner was therefore held entitled to reliefs; ICAI was directed to recognize the retirement of the petitioner from the Firm ‘M/s. R. Kumar and Associates’.

[Joshi John v. Institute of Chartered Accountants, 2021 SCC OnLine Ker 1876 , decided on 26-04-2021]


Kamini Sharma, Editorial Assistant has put this report together 

Appearance before the Court by:

Counsel for the Petitioner: V.M.Krishnakumar

Counsel for the Respondents: M.Gopikrishnan Nambiar, K.John Mathai, Joson Manavalan, Kuryan Thomas, Paulose C. Abraham, Ann Maria Francis, B.S.Suraj Krishna and Febin Raj T.S.

Punjab and Haryana High Court
Case BriefsHigh Courts

Punjab and Haryana High Court: The Division Bench comprising of Ravi Shanker Jha, CJ., and Arun Palli, J., heard the instant petition wherein the issue before the Bench was whether a partner can claim the expedience of erstwhile partnership firm in an individual capacity. The Bench stated,

“The petitioner herein having applied independently without any partners, consortium or joint venture, cannot rely upon the technical qualifications of a third party (erstwhile firm) to claim eligibility.”

The petitioner-A.G. Construction Co. was a proprietorship, which had submitted a bid in response to a tender released by the respondent authority. The bid submitted by the petitioner was rejected upon technical evaluation by the duly constituted committee; the representation against rejection of its bid had also been declined. Earlier, the petitioner was a partner in B.G. Constructions Co. (erstwhile partnership firm), and held 50% share. The said firm was dissolved on 25-06-2019 and it was agreed between the partners that they were free to set up their new ventures and could also use the technical and financial credentials of the firm corresponding to their respective shares.

The eligibility for applying for tender, as set out by the respondent was:

  • Satisfactorily completed, during the last five years at least three Multi Storey RCC Framed Structure Government Office Building/Institute Building works costing not less than the amount equal to 40% of the estimated cost (Rs. 3,95,47,577) of the tender; or
  • Two Multi Storey RCC Framed Structure Government Office Building/Institute Building works costing not less than the amount equal to 60% of the estimated cost of the tender; or
  • One Multi Storey RCC Framed Structure Government Office Building/Institute Building work of aggregate cost not less than the amount equal to 80% of the estimated cost put to tender.

 The tender submitted by the petitioner was rejected during technical evaluation, for the authority opined that the work experience of B.G. Constructions Co., (erstwhile partnership firm) could not be reckoned as an experience of the petitioner.

The grievance of the petitioner was that the experience gained by the proprietor of the petitioner-concern, as a partner in B.G. Constructions Co., was required to be computed in proportion to his 50% share. Therefore, he was entitled to claim proportionate experience in terms of his share out of the experience acquired by the firm. Accordingly, for the work done by the firm at Rs.852 lakhs, the petitioner, in terms of his share, should be deemed to have executed one work valuing Rs. 426 lakhs (852/2).

Reliance was placed on the judgment of Supreme Court in New Horizons Ltd. v. Union of India, (1995) 1 SCC 478, wherein it was held that in the absence of any exclusionary clause in the tender document, it could not be said that past experience of a partner of the firm could not be considered. The petitioner had argued that partnership firm is not a separate legal entity but only a compendious mode of describing its partners, therefore, the experience of the firm is indeed the experience of its partners, and thus, ought to have been reckoned, while evaluating the eligibility of the petitioner.

Whether the experience gained by erstwhile partnership firm could be construed as experience of the petitioner in his individual capacity?

The experience in the firm is acquired by the combined, collective and integrated labour of its partners, who, apart from their individual investments, had pooled in their respective resources, skill, knowledge, experience, ideas and information.

The Bench opined that it was the firm that had executed the project and not the partners individually. It is true that from the same subject of experience, more than one can gain experience, however, that must not by itself evince the conclusion that each person gaining ‘experience’ (limited to their contribution) in the output jointly created by them, is entitled to the benefit of the output in its entirety.

“…experience of a firm, in reality, is nothing but the experience of the partners who compose it; such experience of a firm is not in its entirety attributable to each individual partner, but attributable only to the collective effort of all partners concerned.”

 The experience gained by the erstwhile firm was acquired owing to combined, collective and integrated labour and resources of its partners, and hence, was so inseparably interwoven that it was neither divisible nor could it be apportioned amongst its partners. Unlike a joint holding where a co-sharer has a right to seek partition of his defined share.

Hence, the Bench opined that coercing a tender inviting authority to blindly treat experience in the name of an erstwhile partnership firm as the experience of the partner in his individual capacity, would militate against every judicious consideration.

Whether the work experience of the firm could be claimed in proportion to the share  held by the petitioner?

The financial stakes or share held by a partner per se has no nexus with the experience he is required to possess in terms of the tender conditions. In other words, experience is not a commodity that could be acquired for consideration

If the project executed by the firm was reduced in proportion to the share of the petitioner (50%), then, as a necessary consequence, not only the work/project but even the experience that stems from its execution would lose its character and conclusivity, for that too would be reduced proportionately.

The petitioner, sole proprietorship concern having applied for the tender independently, had sought to rely on an experience certificate issued to a third party (B.G. Constructions Co.). The relationship of Ajay Kumar Garg (proprietor of the petitioner concern) with such a third party (erstwhile firm) did not engender any benefit to the petitioner. Therefore, the petitioner having applied independently without any partners, consortium or joint venture, could not rely upon the technical qualifications of a third party (erstwhile firm) to claim eligibility.

Lastly, the Bench opined that the interpretation, construction and as to how a provision, clause or a condition of a tender document has to be construed is primarily the domain of the author of such document and in the instant case no one else was better positioned and equipped than the authority itself in understanding the tender document’s requirements. Hence, the Bench denied existence of unfairness, arbitrariness, irrationality or mala fides, either in the respondent authority’s rejection of the experience certificate, or in the decision-making process which preceded the respondent authority’s rejection of the petitioner’s technical bid being non-responsive. Consequently, the petition was dismissed.[A.G. Construction Co. v. Food Corporation of India, 2021 SCC OnLine P&H 306, decided on 10-02-2021]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance before the Court by:

For the Petitioner: Adv. Puneet Gupta,

For the Respondent: Adv. K.K. Gupta,

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): A Division Bench of Chandra Bhan Singh (Technical Member) and Suchitra Kanuparthi (Judicial Member) dismissed an application that was filed under Section 9 of Insolvency & Bankruptcy Code, 2016 against Bigdream Ventures Private Limited, Corporate Debtor, for initiating Corporate Insolvency Resolution Process (CIRP).

A partner of the petitioner partnership firm had filed the instant application claiming an amount of Rs 11,03,150 plus interest @ 12% p.a. from the Corporate Debtor. The Petitioner was engaged in providing services of pathology laboratory. The Corporate Debtor was engaged in managing, running and operating hospitals and providing various medical services including and limited to OPD, IPD, ICU and other critical medical facilities. The Corporate Debtor had approached the Petitioner to provide certain pathology services on a regular basis while operating and managing one hospital, for which they demanded interest free refundable deposit of Rs 9,00,000, it was mutually agreed that for the pathology services provided, the petitioner shall issue a monthly-statements containing the details and same shall be immediately paid, in full, upon the receipt. The petitioner had transferred the said amount to the Corporate Debtor, contrary to mutually agreed terms; the Corporate Debtor started making delayed payment.

The Corporate Debtor on the other hand contended that the petitioner was not registered under the Partnership Act, 1932 and it was merely managing the business another legal entity i.e. “Aarogyam Multi-speciality Hospital Pvt. Ltd.”. The contractual relationship is between the Petitioner and Aarogyam Multi-speciality Hospital Pvt. Ltd. and not between the Petitioner and the Corporate Debtor.

The Tribunal while dismissing the application found that petitioner was an unregistered partnership firm and, there has been the certain business relationship between the petitioner and thus amounts were paid by the Corporate Debtor to the Petitioner, even though the bills/invoices were actually raised in the name of Arogyam Hospitals who actually engaged the pathological services of the petitioner at the behest of the Corporate Debtor and it was evident that the Invoices were not raised against the Corporate Debtor.

The facts also revealed that Arogyam Hospital was run by the Corporate Debtor, but there was no contractual relationship between the petitioner and corporate debtor as the basis of the claim is in the name of Arogyam Hospitals.

The medical Council rules further prohibited such practise of referral fee on the commission basis and therefore such contracts were void and unenforceable contracts. [Shree Pathology Laboratory v. Bigdream Ventures (P) Ltd., 2020 SCC OnLine NCLT 806, decided on 10-08-2020]


*Suchita Shukla, Editorial Assistant has put this story together