The Bombay High Court has clarified that prosecution under Section 138 of the Negotiable Instruments Act against partners of a firm cannot rest on vague assertions or mere association with the entity. The judgment reinforces that privity of contract and specific involvement are indispensable for criminal liability in cheque dishonour cases.
Background & Facts
The Dispute
The appellant, a private lender, alleged that the respondents - partners of Om Engineers and Builders - undertook to discharge a hand loan of Rs. 56.5 lakh owed by a third party, Mr. Hirachand Pagaria. To secure this obligation, Respondent No. 3 issued a cheque for Rs. 78 lakh, drawn on Bank of Baroda, payable to the appellant. The cheque was dishonoured on 25 February 2006. The appellant filed a complaint under Section 138 of the NI Act, leading to conviction by the Trial Court.
Procedural History
- 2006: Complaint filed before Judicial Magistrate, First Class, Pune (S.C.C. No. 0420758/2006)
- 2008: Trial Court convicted all five accused partners under Section 138 NI Act
- 2011: Additional Sessions Judge allowed the appeal, acquitting all accused on grounds of insufficient evidence
- 2011: Appellant filed Criminal Appeal No. 1120 of 2011 before the Bombay High Court
Relief Sought
The appellant sought reversal of the acquittal and restoration of the conviction, arguing that the Sessions Court erred in disregarding the cheque issuance and the alleged undertaking of liability.
The Legal Issue
The central question was whether Section 138 of the NI Act can be invoked against partners of a firm in the absence of: (1) any privity of contract between the complainant and the partners, and (2) specific averments in the complaint establishing their individual role in the transaction.
Arguments Presented
For the Appellant
The appellant relied on the issuance of the cheque and the oral testimony of the complainant, asserting that the partners’ voluntary assumption of a third party’s debt satisfied the requirement of ‘consideration’ under Section 138. He cited K. Bhaskaran v. Sankaran Vaidhyan Balan to argue that liability need not arise from direct debt, but can stem from a collateral obligation. He contended that the Sessions Court erred in requiring documentary proof of liability assumption.
For the Respondent
The respondents argued that no evidence established that any partner had a direct financial relationship with the complainant. They emphasized that the cheque was issued as a security for a debt owed by a third party, with no written undertaking or admission of liability. They relied on Kamalkishore Shrigopal Taparia v. India Ener-Gen Private Limited and N.K. Wahi v. Shekhar Singh to assert that mere partnership status without specific allegations of involvement renders prosecution unsustainable.
The Court's Analysis
The Court undertook a rigorous examination of the evidentiary record and the statutory framework under Section 138 NI Act. It held that the offence requires proof of a legally enforceable debt or liability owed by the accused to the complainant at the time of cheque issuance. The Court found no such privity established.
"The Complainant is unable to prove beyond a reasonable doubt that any of the Accused took over the liability of Mr. Pagaria. There is neither any document nor any record of such acceptance of liability."
The Court further noted the absence of any explanation for the Rs. 21.5 lakh discrepancy between the original loan and the cheque amount, rendering the claim of debt transfer speculative. The complainant’s admission in cross-examination - that he could not identify which partner was responsible for the firm’s affairs - undermined the entire basis of liability.
The Court also applied the Supreme Court’s recent jurisprudence in Kamalkishore Shrigopal Taparia and N.K. Wahi, holding that mere designation as a partner is insufficient to attract criminal liability. The complaint contained only a bald averment that the partners were "responsible for day-to-day affairs," without specifying their role in the transaction. The Court emphasized:
"There should be clear and unambiguous allegation as to how the Directors [or partners] are in-charge and responsible for the conduct of the business of the company."
The Sessions Court’s conclusion that two reasonable views were possible - either the cheque was issued as security for a third party’s debt, or as a direct obligation - was legally sound. The High Court declined to substitute its view for that of the Trial Court, in accordance with the double presumption of innocence in acquittal appeals.
The Verdict
The appeal was dismissed. The Court upheld the acquittal, holding that Section 138 NI Act cannot be invoked against partners without proof of direct liability and specific averments of involvement. The burden of establishing privity and individual responsibility was not discharged by the complainant.
What This Means For Similar Cases
Specific Averments Are Non-Negotiable
- Practitioners must draft complaints under Section 138 NI Act with precise allegations identifying which partner directed, authorized, or participated in the issuance of the cheque
- Vague phrases like "responsible for business" or "acting on behalf of the firm" are legally inadequate
- Failure to specify individual roles invites dismissal at the threshold
Privity of Contract Is a Threshold Requirement
- A cheque issued to discharge a third party’s debt does not, by itself, create liability under Section 138
- The complainant must prove the accused had a pre-existing legal obligation to them, not merely a moral or collateral assurance
- Oral assurances without corroboration are insufficient to establish liability
Documentary Evidence Trumps Oral Testimony
- In cheque dishonour cases, contemporaneous documents (e.g., loan agreements, undertakings, correspondence) carry decisive weight
- Where the cheque amount bears no logical relation to the alleged debt, courts will treat the claim as speculative
- Courts will not infer liability from circumstantial silence or unexplained discrepancies
