Vicarious Criminal Liability of a Partner When the Partnership Firm is Not an Accused Tried for the Primary/Substantive offence under Negotiable Instrument Act
In the matter of Dilip Hariramani v. Bank of Baroda [Criminal Civil Appeal No. 767 of 2022 decided on 09.05.2022, a partner of the partnership firm challenged his conviction under section 138 read with section 141 of the Negotiable Instruments Act, 1881. He was made accused on account of dishonor of cheque issued by the authorized signatory of the firm for repayment of loan availed by the partnership firm. In the complaint filed by the Bank under Section 138 of the NI Act, the partner of the firm and the authorized signatory were made parties/accused while the firm was not. The accused partner along with the authorized signatory were convicted under Section 138 of the NI Act and sentenced to imprisonment for six months. They were also asked to pay compensation under Section 357(3) of the Code of Criminal Procedure, 1973. If they faltered, they were to suffer additional imprisonment. The appellate Court enhanced the compensation amount under Section 357(3) with the stipulation that the appellant partner and the authorized signatory shall suffer additional imprisonment for three months in case of failure to pay.
An important question arose for consideration of the Hon’ble Supreme Court – “whether a partner can be convicted and held to be vicariously liable when the partnership firm is not an accused and is not being tried for the primary/substantive offence”.
The Court analysed the provision under section 141 of the NI Act. The section has been reproduced herein below:
“141. Offences by companies.—(1) 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:
Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.
Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this chapter.
(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. 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.
The Court observed that expression ‘every person’ is wide and comprehensive, however, such person should also be in charge of and responsible to the company for the conduct of its business for being liable under the section. The initial onus and burden is on the prosecution to first establish the requirements of sub-section (1) to Section 141 of the NI Act.
The Court referred to the case of State of Karnataka v. Pratap Chand and Others (1981) 2 SCC 335 wherein the complaint against the firm and the partners was made under Section 34 of the Drugs and Cosmetics Act which is pari materia to Section 141 of the NI Act. The Court in the said matter quashed the conviction of the partner of the firm on the ground that he could not have been convicted merely because he had the right to participate in the firm’s business as per the partnership deed. The Court clarified that a partner is not vicariously liable for an offence committed by the firm, unless “he was in charge of, and was responsible to, the firm for the conduct of the business of the firm or if it is proved that the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of the partner concerned.” The Court had in the case relied on the judgment in G.L. Gupta v. D.H. Mehta (1971) 3 SCC 189 wherein the expression ‘in-charge’ was explained stating that “It seems to us that in the context a person ‘in-charge’ must mean that the person should be in overall control of the day to day business of the company or firm. This inference follows from the wording of Section 23-C(2). It mentions director, who may be a party to the policy being followed by a company and yet not be incharge of the business of the company. Further it mentions manager, who usually is in charge of the business but not in overall charge. Similarly the other officers may be in charge of only some part of business”. The complaint in this case was filed under Section 23-C of the Foreign Exchange Regulation Act, 1947 which was parti materia with Section 34 of the Drugs and Cosmetics Act.
The Court further referred to National Small Industries Corporation Limited v. Harmeet Singh Paintal and Another (2010) 3 SCC 330, the judgment that summarized the law under section 141 of the NI Act. The Court in the case had laid down that “Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.” It was further explained that “Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with averments in the petition containing that the accused were in charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with.”
The Court in the present matter once again applied the precedents laid down by it and ruled that “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. The Partnership Act, 1932 creates civil liability. Further, the guarantor’s liability under the Indian Contract Act, 1872 is a civil liability. The appellant 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[1]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.”
The Court observed that in the present matter the initial legal notice was issued only to the authorized signatory. The complaint was filed against the authorized signatory and the partner who was the appellant. The Firm was neither accused nor summoned to be tried. In this background the Court referred to Dayle De’souza v. Government of India through Deputy Chief Labour Commissioner (C) and Another 2021 SCC OnLine SC 1012 (), State of Madras v. C.V. Parekh and Another (1970) 3 SCC 491 (wherein the complaint was filed under Section 10 of the Essential Commodities Act and the Court held rejected the argument that persons in charge of were responsible on the ground that it ignores the first condition for the applicability of Section 10 that the person contravening the order must be a company itself), Sheoratan Agarwal and Another v. State of Madhya Pradesh (1984) 4 SCC 352, Anil Hada v. Indian Acrylic Ltd. (2000) 1 SCC 1 and finally Aneeta Hada v. Godfather Travels and Tours Private Ltd. (2012) 5 SCC 661. In Aneeta Hada, the Court upheld the judgment in C.V. Parekh and confirmed “…for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative.” and clarified that the judgments in Sheoratan Agarwal and Anil Hada are overruled. The Court therefore ruled in unqualified terms that “unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) [of section 141 of NI Act] would not be liable and convicted as vicariously liable.” The judgment in Aneeta Hada, however, laid down one exception and that was when there is a legal bar for prosecuting a company or a firm. Since this plea was neither taken nor application in the present case, the Court proceeded to set aside the conviction of the appellant partner of the firm.
