Supreme Court clarifies the liability of partners under Section 141 of the Negotiable Instruments Act in cheque bounce cases: G Ramesh vs. Kanike Harish Kumar Ujwal & Anr. (2019)

Date of the Judgment: April 5, 2019
Citation: 2019 INSC 295
Judges: Dr. Dhananjaya Y Chandrachud, J and Hemant Gupta, J
Can a partner of a firm be held liable for a cheque bounce when the firm is the primary offender? The Supreme Court of India addressed this critical question in a recent judgment. The court examined whether the complaint contained sufficient averments to proceed against a partner of a firm under Section 141 of the Negotiable Instruments Act, 1881. This case clarifies the extent of a partner’s responsibility in cases of cheque dishonour by a firm.

Case Background

The appellant, G. Ramesh, filed a complaint against the respondents, alleging that a partnership firm, Vainqueur Corporate Services, had defaulted on payments for data entry work. The firm, represented by its managing partner (accused No. 3) and another partner, Kanike Harish Kumar Ujwal (the first respondent and accused No. 2), had engaged the appellant for data entry work. The firm had initially taken a caution deposit of Rs 1,00,000 from the complainant in August 2010. Subsequently, the complainant was assigned data entry work from September to December 2010. For the work done, the firm issued two cheques: one for Rs 2,00,000 dated 01.11.2010 and another for Rs 2,50,000 dated 18.12.2010. These cheques were dishonoured due to insufficient funds.

Following the dishonour of the first set of cheques, the first respondent transferred Rs. 1,00,000 to the complainant’s account in February 2011. The firm then issued two more cheques, each for Rs 2,00,000, dated 30.05.2011 and 19.07.2011. These cheques were also dishonoured. The complainant alleged that despite repeated attempts to contact the accused, the payments were not made. A notice of demand was issued on 1 August 2011, but the payment was not made. The complaint was filed on 19 September 2011.

Timeline

Course of Proceedings

The complaint was initially filed before the Special Judicial Magistrate First Class, Mahabubnagar. The first respondent, Kanike Harish Kumar Ujwal, failed to appear, leading to the issuance of non-bailable warrants, which were later recalled. Subsequently, the first respondent filed a petition under Section 482 of the Code of Criminal Procedure, 1973 (CrPC) before the High Court of Judicature at Hyderabad. The High Court quashed the proceedings, holding that the averments in the complaint were insufficient to establish criminal liability against the first respondent under Section 138 of the Negotiable Instruments Act, 1881. The appellant then appealed to the Supreme Court.

Legal Framework

The case revolves around Section 138 and Section 141 of the Negotiable Instruments Act, 1881. Section 138 deals with the offence of dishonour of cheques for insufficiency of funds. Section 141, titled “Offences by companies,” extends this liability to persons in charge of and responsible for the conduct of the business of a company.

Section 141(1) of the Negotiable Instruments Act, 1881 states:
“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 and shall be liable to be proceeded against and punished accordingly…”

The explanation to Section 141 of the Negotiable Instruments Act, 1881 clarifies that:
“Explanation – For the purposes of this section –
(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 is crucial as it brings partnership firms within the ambit of Section 141, treating them as “companies” for the purpose of this section.

Arguments

The appellant argued that the complaint contained sufficient averments to implicate the first respondent under Section 141 of the Negotiable Instruments Act, 1881. They relied on the Supreme Court’s decision in Gunmala Sales Private Limited v. Anu Mehta and Others [(2015) 1 SCC 103], arguing that a holistic reading of the complaint shows that the first respondent was responsible for the conduct of the business.

The first respondent contended that there was no specific averment in the complaint that he was in charge of and responsible for the conduct of the business of the firm. He argued that he resides in Kuwait and is employed with the National Bank of Kuwait and therefore, has no day-to-day connection with the affairs of the partnership firm.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the complaint contained sufficient averments to meet the requirements of Section 141(1) of the Negotiable Instruments Act, 1881, to proceed against the first respondent, a partner in the firm.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the detailed factual averments in the complaint, which sufficiently described the first respondent’s role and involvement in the business transactions. The court emphasized the importance of a holistic reading of the complaint to determine if the requirements of Section 141 of the Negotiable Instruments Act, 1881 are met. The court also noted that the High Court had erred in treating the partnership firm as a company with directors, overlooking the fact that a partnership firm is included in the definition of “company” under Section 141.

Logical Reasoning

The court’s reasoning was based on a careful analysis of the complaint and the relevant legal provisions. The court emphasized that the complaint contained sufficient details about the partnership, its business, and the first respondent’s role, particularly his involvement in transferring funds and assuring payment. The court rejected the High Court’s narrow interpretation of the term “company” under Section 141, clarifying that it includes partnership firms.

The Court quoted from Gunmala Sales Private Limited v. Anu Mehta and Others [(2015) 1 SCC 103]:
“When a petition is filed for quashing the process, in a given case, on an overall reading of the complaint, the High Court may find that the basic averment is sufficient, that it makes out a case against the Director; that there is nothing to suggest that the substratum of the allegation against the Director is destroyed rendering the basic averment insufficient and that since offence is made out against him, his further role can be brought out in the trial.”

The Court also quoted:
“When in view of the basic averment process is issued the complaint must proceed against the Directors. But, if any Director wants the process to be quashed by filing a petition under Section 482 of the Code on the ground that only a bald averment is made in the complaint and that he is really not concerned with the issuance of the cheque, he must in order to persuade the High Court to quash the process either furnish some sterling incontrovertible material or acceptable circumstances to substantiate his contention.”

The court also noted:
“The complaint contains a recital of the fact that the first set of cheques were returned for insufficiency of funds. It is alleged that the first respondent transferred an amount of Rs 1,00,000 on 8 February 2011 and 10 February 2011. The complaint also contains an averment that after the second set of cheques were dishonoured, the accused assured the complainant that they will be honoured on re-presentation in the month of July 2011. The averments are sufficient to meet the requirement of Section 141(1).”

There were no dissenting opinions in this case.

Key Takeaways

• ✓ Partners of a firm can be held liable for offences under Section 138 of the Negotiable Instruments Act, 1881 if the complaint contains sufficient averments that they were in charge of and responsible for the conduct of the business.
• ✓ The term “company” under Section 141 of the Negotiable Instruments Act, 1881 includes a partnership firm.
• ✓ A holistic reading of the complaint is essential to determine if there are sufficient averments to proceed against a partner.
• ✓ To quash a complaint, a partner must present incontrovertible evidence showing they were not in charge of the business.

Directions

The Supreme Court allowed the first respondent to move an application before the Trial Court seeking exemption from appearance, which would be considered in accordance with the law.

Development of Law

The ratio decidendi of this case is that a complaint under Section 138 of the Negotiable Instruments Act, 1881 against a partnership firm must contain sufficient averments to establish the liability of the partners under Section 141. The court clarified that the term “company” includes a partnership firm and that a partner can be held liable if the complaint demonstrates their involvement in the conduct of the business. This judgment reinforces the principle that partners cannot evade liability by claiming lack of day-to-day involvement if the complaint contains sufficient evidence to the contrary. This case clarifies the interpretation of Section 141 of the Negotiable Instruments Act, 1881, specifically in relation to partnership firms, and reinforces the principle that partners are liable for the firm’s actions if they are in charge of and responsible for the conduct of the business.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s order. The court held that the complaint contained sufficient averments to proceed against the first respondent, a partner in the firm, under Section 141 of the Negotiable Instruments Act, 1881. The judgment clarifies that partners can be held liable for cheque dishonour if the complaint demonstrates their role in the firm’s business and transactions.