Supreme Court closes loophole, puts business partners on notice

Mint

29-07-2025

A recent Supreme Court ruling has plugged a longstanding loophole that often allowed defaulting partners of a firm to escape liability and evade prosecution on procedural grounds.
In a judgment delivered on a cheque-bounce case, the Supreme Court on 14 July ruled that such partners can be prosecuted directly even if the partnership firm itself is not formally named as an accused.
Setting aside a previous Madras High Court order, the apex court emphasised the fundamental legal distinction between a partnership firm and a company, reinforcing that partners bear direct, joint, and several liability for a partnership firm's actions—unlike directors of a company.
A partnership firm and its partners are the same in the eyes of the law, and thus, a notice to such partners is effectively a notice to the firm, the Supreme Court clarified.
Legal experts said the Supreme Court's decision would have wide-ranging implications for commercial litigation, as it strengthens the position of creditors by ensuring that individuals responsible for issuing dud cheques from partnership accounts can be held accountable more swiftly.
The core of the issue rested on the interpretation of Section 141 of the Negotiable Instruments Act. It deals with offences by companies and also outlines the liability of partners when a firm commits an offence under Section 138, which relates to dishonoured cheques.
'Earlier, many courts had taken the view that a complaint under Section 138 of the Negotiable Instruments Act against the partners of a partnership firm was not maintainable unless the firm itself was also named as an accused and served with a statutory notice," said Abhinav Agnihotri, partner at Burgeon Law. 'This often allowed the accused partners to escape prosecution on technical grounds."
The Supreme Court's ruling dismantled this defence.
'The court reasoned that, under Indian law, a partnership firm is not a separate legal entity from its partners, who are jointly and severally liable," Agnihotri added. 'This significantly streamlines the prosecution process in cheque-bounce cases by removing a technical hurdle, making it practically easier and quicker to proceed against the individuals responsible."
The ruling's distinction between a traditional firm and a limited liability partnership will be useful in interpreting other statutes like the Companies Act, said Gaurav Pingle, a company secretary.
'The Supreme Court has upheld the basic principles of corporate law—i.e., separate legal entity, perpetual succession, (and) liability of partners in relation to the liability of partnership firm under Negotiable Instruments Act, 1881," he said.
'Every partner is liable'
The case involved a loan of ₹21 lakh advanced by Dhanasingh Prabhu to partners in Mouriya Coirs. One partner, on behalf of the firm, issued a cheque towards repaying the loan, but the cheque was dishonoured because the firm's account was frozen.
While Prabhu issued a statutory notice to two partners of Mouriya Coirs, he did not name the firm as an accused. The Madras High Court quashed the complaint on the grounds that the firm was not arraigned as an accused.
Reversing this, the Supreme Court delved into the distinct nature of a partnership firm. Justice B.V. Nagarathna, writing for the bench, observed that a partnership is fundamentally different from a company.
'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," he wrote.
The Supreme Court clarified that a firm is merely a 'compendious name" for its partners. In effect, proceeding against the partners is proceeding against the firm itself.
'Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner," the court noted, referencing Section 25 of the Indian Partnership Act.
'A complaint can validly lie against the partners without naming the firm, since the liability is personal and not vicarious," said Suvigya Awasthy, partner at PSL Advocates and Solicitors.
While the Supreme Court's judgment settles a key legal question, some experts pointed to potential challenges.
Awasthy raised concerns about the risk of misuse against partners who may not be involved in the day-to-day operations of a partnership firm or a specific transaction that led to a dishonoured cheque.
'Since partners in a partnership firm are personally, jointly and severally liable for the acts of the firm, a complaint under the NI Act (Negotiable Instruments Act) can be filed against all the partners, regardless of their actual role or involvement in the specific transaction," he warned.