Supreme Court’s view on partnership firm as one of accused in a cheque bounce case
Shubham
Budhiraja[1]
Mr. A advanced a loan of
Rs. 21 lacs to the partnership firm (X+Y). To discharge the debt, X issued a
cheque in favour of Mr. A of the account maintained in the name of partnership
firm. The cheque was issued in the name of firm and signed by X, Partner. The cheque
got dishonoured as account of firm was frozen. The notice was issued against X
and Y and accordingly complaint under section 138 NI Act was filed against X
and Y. Neither the notice was sent to firm not the firm was made as accused in
the complaint. The Hon’ble HC quashed the complaint the ground that while the
cheque was issued on behalf of the partnership firm, no statutory notice was issued
to the partnership firm and it was also not arraigned as an accused in the
complaint. The Hon’ble Supreme Court held as under[2]:
1.
Even if we have to come to the conclusion
that the juristic entity i.e., the partnership firm is the primary accused in
the instant case it would be necessary for us to also state that such a
juristic entity, namely, a partnership firm is
not distinct from the partners who comprise the partnership.
2.
If the complainant had proceeded only
against the partnership firm and not the partners it possibly could have been
held that the partnership firm in the absence of its partners is not a complete
juristic entity which can be recognised in law and therefore cannot be
proceeded against. On the other hand, in the
instant case the complainant has proceeded against the two partners. The
complainant is aware of the fact that the cheque has been issued in the name of
the partnership firm and has been signed by one of the partners.
3.
The complainant has proceeded against the
partners only without arraigning the partnership firm as an accused. It is necessary
to reiterate that a partnership firm in the absence of its partners cannot at
all be considered to be a juristic entity in law. On the other hand, 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.
4.
Therefore, 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. 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.
5.
Alternatively, notice to the
partners/accused could have been construed as notice to the partnership firm
also. We say so for the reason 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. Therefore, a partnership firm, in the absence of the
partners being arraigned as accused would not serve the purpose of the case and
would be contrary to law. On the other hand, even in the absence of making a
partnership firm an accused in the complaint, the partners being made the accused
would be sufficient to make them liable inasmuch as the partnership firm
without the partners is of no consequence and is not recognised in law.
6.
The law of partnership was first codified
in India by the Indian Partnership Act, 1932. Prior to the coming in force of
the Partnership Act, Chapter XI of the Indian Contract Act, 1872 (hereinafter
‘ICA’) defined a partnership, outlined the rights and obligations of partners
and provided various provisions governing the operation and existence of
partnerships
7.
The Partnership Act was promulgated as it
was considered expedient to define and amend the law relating to partnership.
As it stands today, partnership law is codified in the Partnership Act and the
Limited Liability Partnership Act, 2008. It is trite that these legislations,
like all codifications of partnership law in common law, are based on the law
of agency.
8.
The definition in Section 4 of the
Partnership Act is a departure from the erstwhile definition of partnership in Section
239 of ICA. A significant departure, inter alia, is the insertion of “acting
for all” which brings in the concept of agency. An amendment of substantial
import carried out by the Special Committee was with the intent to elucidate
clearly the fundamental principle that the partners when carrying on the
business of the firm are agents as well as principals.
9.
The partnership is merely a convenient
name to carry out business by partners. Thus, a firm is not an entity of
persons in law but is merely an association of individuals and firm name is
only a collective name of those individuals who constitute the firm. In other
words, the firm name is merely an expression, only a compendious mode of designating
the persons who have agreed to carry on business in partnership. Thus, a firm
may not be a legal entity in the sense of a corporation or a company
incorporated under the Companies Act, 1956 or 2013, but it is still an existing
concern where business is done by a number of persons in partnership.
10.
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 fundamental distinction between a firm and a company rests on
the premise that the company is separate from its shareholders.
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