{"id":364404,"date":"2025-10-21T12:00:52","date_gmt":"2025-10-21T06:30:52","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=364404"},"modified":"2025-10-21T10:28:41","modified_gmt":"2025-10-21T04:58:41","slug":"supreme-court-section-138-ni-act","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2025\/10\/21\/supreme-court-section-138-ni-act\/","title":{"rendered":"Stretching the Statute? Supreme Court’s Bold Take on Section 138 of the Negotiable Instruments Act, 1881"},"content":{"rendered":"
\n

Introduction<\/h2>\n

In a significant judgment delivered on 14-7-2025, the Supreme Court in Dhanasingh Prabhu<\/span> v. Chandrasekar<\/span>1<\/sup><\/a> has departed from established precedent regarding prosecution of partnership firms and their partners under Section 141<\/a>2<\/sup><\/a> of the Negotiable Instruments Act, 1881<\/a>3<\/sup><\/a> (NI Act). The two-Judge Bench of Justices B.V. Nagarathna and Satish Chandra Sharma has held that complaints under Section 1384<\/sup><\/a> 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.<\/p>\n

Factual background<\/h3>\n

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.<\/p>\n

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.<\/p>\n

Issues considered<\/h3>\n

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?<\/p>\n

The Supreme Court’s reasoning<\/h3>\n

(1) Distinction between partnership firms and companies<\/p>\n

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.<\/p>\n

The Court relied on Section 4<\/a>5<\/sup><\/a> of the Partnership Act, 1932<\/a>6<\/sup><\/a> 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”.<\/p>\n

(2) Legal status of partnership firms<\/p>\n

The Court relied on several precedents such as Aron Salomon (Pauper)<\/span> v. A. Salomon & Co. Ltd.<\/span>7<\/sup><\/a>, Bacha F. Guzdar<\/span> v. CIT<\/span>8<\/sup><\/a>, Dulichand Laxminarayan<\/span> v. CIT<\/span>9<\/sup><\/a> and CIT<\/span> v. R.M. Chidambaram Pillai<\/span>10<\/sup><\/a> and observed that a partnership firm, unlike a company registered under the Companies Act11<\/sup><\/a>, 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.<\/p>\n

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.<\/p>\n

(3) Joint and several liability of partners<\/p>\n

The Court explained that under Sections 25<\/a>12<\/sup><\/a> and 26<\/a>13<\/sup><\/a> of the Partnership Act, 1932<\/a>, 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.<\/p>\n

(4) Application to Section 141 of the NI Act<\/p>\n

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<\/span>). 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.<\/p>\n

(5) Distinguished precedents<\/p>\n

In its analysis, the Court addressed the decisions in Dilip Hariramani<\/span> v. Bank of Baroda<\/span>14<\/sup><\/a> and Aneeta Hada<\/span> v. Godfather Travels & Tours (P) Ltd<\/span>.15<\/sup><\/a>, 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 Hada<\/span>16<\/sup><\/a>, 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 Hariramani<\/span>17<\/sup><\/a>, 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.<\/p>\n

However, the Court in Dhanasingh Prabhu<\/span>18<\/sup><\/a> 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 Hada<\/span>19<\/sup><\/a> and Dilip Hariramani<\/span>20<\/sup><\/a> does not strictly apply to partnerships.<\/p>\n

Crucially, in Dhanasingh Prabhu<\/span>21<\/sup><\/a>, 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.<\/p>\n

(6) Procedural flexibility<\/p>\n

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<\/span>) notice to partners could be construed as notice to the partnership firm; (ii<\/span>) even without making the firm an accused, partners being accused would be sufficient; and (iii<\/span>) the defect, if any, was not significant or incurable.<\/p>\n

Legal implications<\/h2>\n

(1) Maintainability of the complaint<\/p>\n

The Supreme Court’s decision22<\/sup><\/a> 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.<\/p>\n

(2) Requirements to be kept in mind while issuing notices<\/p>\n

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.<\/p>\n

(3) Prosecution strategy<\/p>\n

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

Conclusion<\/h3>\n

In its conclusive findings, the Supreme Court held23<\/sup><\/a> 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.<\/p>\n

Importantly, the judgment distinguished the precedent set in Aneeta Hada<\/span>24<\/sup><\/a>, 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.<\/p>\n

Critical assessment<\/h3>\n

The Dhanasingh Prabhu<\/span>25<\/sup><\/a> 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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n<\/div>\n\n

*Counsel, Bombay High Court. Author can be reached at: jugalkanani@gmail.com.<\/span><\/strong><\/p>\n

1.<\/a> 2025 SCC OnLine SC 1419.<\/a><\/p>\n

2.<\/a> Negotiable Instruments Act, 1881, S. 141.<\/a><\/p>\n

3.<\/a> Negotiable Instruments Act, 1881.<\/a><\/p>\n

4.<\/a> Negotiable Instruments Act, 1881, S. 138.<\/a><\/p>\n

5.<\/a> Partnership Act, 1932, S. 4.<\/a><\/p>\n

6.<\/a> Partnership Act, 1932.<\/a><\/p>\n

7.<\/a> 1897 AC 22.<\/a><\/p>\n

8.<\/a> (1954) 2 SCC 563 : (1955) 27 ITR 1 : (1955) 25 Comp Cas 1.<\/a><\/p>\n

9.<\/a> (1956) 1 SCC 269 : (1956) 29 ITR 535.<\/a><\/p>\n

10.<\/a> (1977) 1 SCC 431 : 1977 SCC (Tax) 188 : (1977) 106 ITR 292.<\/a><\/p>\n

11.<\/a> Companies Act, 2013<\/a>.<\/p>\n

12.<\/a> Partnership Act, 1932, S. 25.<\/a><\/p>\n

13.<\/a> Partnership Act, 1932, S. 26.<\/a><\/p>\n

14.<\/a> (2022) 19 Comp Cas-OL 20 : 2022 SCC OnLine SC 579.<\/a><\/p>\n

15.<\/a> (2012) 5 SCC 661 : (2012) 172 Comp Cas 75.<\/a><\/p>\n

16.<\/a> (2012) 5 SCC 661 : (2012) 172 Comp Cas 75.<\/p>\n

17.<\/a> (2022) 19 Comp Cas-OL 20 : 2022 SCC OnLine SC 579.<\/a><\/p>\n

18.<\/a> 2025 SCC OnLine SC 1419.<\/a><\/p>\n

19.<\/a> (2012) 5 SCC 661 : (2012) 172 Comp Cas 75.<\/a><\/p>\n

20.<\/a> (2022) 19 Comp Cas-OL 20 : 2022 SCC OnLine SC 579.<\/a><\/p>\n

21.<\/a> 2025 SCC OnLine SC 1419.<\/a><\/p>\n

22.<\/a> Dhanasingh Prabhu case<\/span>, 2025 SCC OnLine SC 1419.<\/a><\/p>\n

23.<\/a> Dhanasingh Prabhu case<\/span>, 2025 SCC OnLine SC 1419.<\/a><\/p>\n

24.<\/a> (2012) 5 SCC 661 : (2012) 172 Comp Cas 75.<\/a><\/p>\n

25.<\/a> 2025 SCC OnLine SC 1419.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

by Jugal J. Kanani*<\/p>\n","protected":false},"author":67011,"featured_media":364405,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42503,1191],"tags":[91170,56002,29922,91166,91171,91172,91173,91169,91168,91167,91165,23584,43754],"class_list":["post-364404","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-legal-analysis","category-op-ed","tag-business-loan-dispute","tag-cheque-bounce-case","tag-cheque-dishonour","tag-criminal-liability-of-partners","tag-frozen-bank-account","tag-indian-partnership-law","tag-legal-compliance-ni-act","tag-legal-precedent-india","tag-madras-high-court-order","tag-mouriya-coirs","tag-partnership-firm-prosecution","tag-section-138-ni-act","tag-supreme-court-judgment"],"yoast_head":"\nSupreme Court's Bold Take on Section 138 NI Act<\/title>\n<meta name=\"description\" content=\"Explore the Supreme Court\u2019s latest interpretation of Section 138 of the Negotiable Instruments Act, raising questions about legal boundaries and statutory scope.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.scconline.com\/blog\/post\/2025\/10\/21\/supreme-court-section-138-ni-act\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Stretching the Statute? 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Court answers","author":"Bhumika Indulia","date":"February 16, 2021","format":false,"excerpt":"Allahabad High Court: Ravi Nath Tilhari, J., addressed a matter wherein a person being the director of the company signed a cheque on behalf of the company and since the said cheque got dishonoured, he was made liable, without the company being made liable under the offence of Section 138\u2026","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":223585,"url":"https:\/\/www.scconline.com\/blog\/post\/2019\/12\/25\/madras-hc-s-1422-of-negotiable-instruments-amendment-act-2015-not-ultra-vires-of-art-14-of-constitution-legislation-can-take-away-the-basis-of-a-judgment\/","url_meta":{"origin":364404,"position":2},"title":"Madras HC | S. 142(2) of Negotiable Instruments Amendment Act, 2015 — not ultra vires of Art. 14 of Constitution; Legislation can take away the basis of a Judgment","author":"Bhumika Indulia","date":"December 25, 2019","format":false,"excerpt":"Madras High Court: A Division Bench of A.P. Sahi, CJ and Subramonium Prasad, J., while deciding a petition filed in regard to declaring Section 142(2) of the Negotiable Instruments Act, 1881 as ultra vires Article 14 of Constitution, held by placing reliance on certain cases that, \u201cParliament is competent to\u2026","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":281009,"url":"https:\/\/www.scconline.com\/blog\/post\/2023\/01\/04\/compilation-of-important-judgments-of-supreme-court-and-high-courts-regarding-section-138-of-the-negotiable-instruments-act-1881\/","url_meta":{"origin":364404,"position":3},"title":"Compilation of Important Judgments of Supreme Court and High Courts regarding Section 138 of the Negotiable Instruments Act, 1881","author":"Bhumika Indulia","date":"January 4, 2023","format":false,"excerpt":"by Swarnendu Chatterjee\u2020 Anwesha Pal\u2020\u2020 and Yashwardhan Singh\u2020\u2020\u2020 Cite as: 2023 SCC OnLine Blog Exp 11","rel":"","context":"In "Op Eds"","block_context":{"text":"Op Eds","link":"https:\/\/www.scconline.com\/blog\/post\/category\/op-ed\/legal-analysis\/"},"img":{"alt_text":"Negotiable Instruments Act","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/01\/MicrosoftTeams-image141.jpg?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":261806,"url":"https:\/\/www.scconline.com\/blog\/post\/2022\/02\/16\/dishonour-of-cheque-8\/","url_meta":{"origin":364404,"position":4},"title":"Can only a sole proprietor be held liable under S. 138 NI Act for dishonour of cheque drawn on account of sole proprietorship concern? 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Complaint cannot be quashed for the asking. For quashing of a complaint, it must be shown that no offence is made out at all against the Director or Partner.\u201d","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/09\/MicrosoftTeams-image-75-1-1.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/09\/MicrosoftTeams-image-75-1-1.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/09\/MicrosoftTeams-image-75-1-1.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/09\/MicrosoftTeams-image-75-1-1.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/09\/MicrosoftTeams-image-75-1-1.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]}],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts\/364404","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/users\/67011"}],"replies":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/comments?post=364404"}],"version-history":[{"count":0,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts\/364404\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/media\/364405"}],"wp:attachment":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/media?parent=364404"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/categories?post=364404"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/tags?post=364404"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}