Commercial Courts- Delay in preferring appeal-Whether could be condoned?

 

 

Commercial Courts- Delay  in preferring appeal-Whether could be condoned?

If the delay in filing written statement also cannot be condoned in all circumstances

The Supreme Court has dealt with the aforesaid aspect in a matter captioned ad as  M/s. Anvita Auto Tech Works Pvt. Ltd. v M/s. Aroush Motors 2025 INSC 1202. The Supreme Court has deliberated inter alia on the failure to file a written statement within the time stipulated under Rule 1(1) of Order VIII Code of Civil Procedure, 1908 (CPC) and whether the right to cross examination could be denied to a defendant, in case, the written statement was not filed within stipulated time, within the terms of Commercial Courts Act 2015 ( as amended and up to date)  and hence, the written statement was struck off from the record. It is also  discussed if in all cases, the time limit of 120 days in filing written statement is sacrosanct or any exception could be carved out.

The Supreme Court at the very outset had reiterated the words of the Hon’ble Justice V.R. Krishna Iyer:

“Procedural law is not to be a tyrant but a servant, not an obstruction but an aid to justice. It is the handmaid of justice and not its mistress”

It was thus observed, that, the object of the procedural rules is to advance the cause of justice and not to thwart it, and when the rigid adherence to technicalities of procedure causes injustice, courts have to come to the rescue by adopting a liberal approach. It was further observed that the courts cannot countenance a situation where substantial justice is sacrificed, at the altar of procedural rigidity. Where substantial justice is at stake, technicalities must give way to ensure that the litigant is afforded sufficient opportunity to defend. According to the Supreme Court the controversy of the present matter M/s Anvita Auto Tech (Supra) must be tested on the said principle.

To set out the facts the order dated 20.05.2025 in Commercial Appeal No. 19 of 2023  of Karnataka High Court was challenged by the appellant, which has affirmed the Judgement and decree dated 15.11.2022 passed by the Additional City Civil & Sessions Judge (Exclusive Commercial Court) in Original Commercial Suit No. 372 of 2021 filed by the Respondent No. 1-M/s. Aroush Motors for recovery of monies.

                             CHRONOLOGY

S.N	Stage of Commercial Suit (Com (OS No. 372/2021)	Date
1.	Institution of suit before the Commercial Court	18.06.2021
2.	Summons issued to defendant no.1 and 2	23.06.2021
3.	Summon served upon defendant no.1	17.07.2021
4.	Defendant no.1 entered appearance through counsel	07.08.2021
5.	The commercial court directed the defendant no.1 to file written statement by 07.09.2021	17.08.2021
6.	Application filed by the defendant no.1 for seeking extension of time in filing written statement	07.09.2021
7.	The completion of statutory period of 120 days in filing written statement as mandated under the second proviso to sub-rule 1 of Rule 1 of Order V and proviso to sub-rule (1) of  Rule (1) of Order VIII as per the special amendment in the Comme4rcail Courts Act 2015	14.11.2021
8.	Application was filed by defendant no.1 u/s 148 of CPC for enlargement of time in filing written statement	24.11.2021
9.	The plaintiff had preferred application for seeking striking off defence of defendant no.1 due to failure in filing written statement within statutory period of 120 time	06.12.2021
10.	Application filed by the defendant no.1 for seeking to place on record the written statement	07.01.2022
11.	Rejection of application filed by the defendant for seeking to place on record the written statement	22.03.2022
12.	The commercial appeal preferred by the defendant no.1 against the rejection of application for placing written statement on record	21.04.2022
13.	Process of recording of evidence adjourned at the instance of plaintiff	30.07.22 to 10.08.2022
14.	PW-1 was examined in chief and cross examination opportunity as NIL due to failure in filing written statement within stipulated time	19.08.2022
15.	Suit was partly decreed	15.11.2022

                     

The aforesaid chronology may be illustrated further with facts.                                           

BRIEF FACTS

(1)      The original Defendant No. 1-M/s. Anvita Auto Tech Works Pvt. Ltd. (Appellant-herein), had launched a flagship motorcycle by the name of CFMOTO in India in 2019 and invited applications for its dealership across the country including Bengaluru City. Plaintiff-M/s. Aroush Motors (Respondent No. 1-herein) applied and was provisionally appointed dealer under a Letter of Intent dated 03.09.2019. In consideration of the dealership, the plaintiff remitted a sum of Rs. 20,00,000/- (Rupees Twenty Lakhs Only) towards security deposit to Defendant No. 1, incurred expenditure of rent and interiors for setting up a showroom. Further, the plaintiff paid sum amount to Rs. 70,00,000/- (Rupees Seventy Lakhs Only) towards spare parts, software, equipment and initial stock of motorcycles. Moreover, additional sum of Rs. 5,00,000/- (Rupees Five Lakhs Only) was remitted to Defendant No. 1 and on the advice of Defendant No. 1, the plaintiff also remitted Rs. 7,06,900/- (Rupees Seven Lakhs Six Thousand Nine Hundred Only) to Defendant No. 2-Conair Equipment Pvt. Ltd (Respondent No. 2-herein) for service centre equipment being its authorised service provider.

(2)      The Defendant No. 1 supplied Nineteen (19) motorbikes of BS-IV Category to Plaintiff out of which the Eight (8) were sold. On 01.04.2020, the Government imposed ban on the sale of BS-IV Category vehicles, as such, Defendant No. 1 imposed prohibition upon sale of the such motorcycles but promised to supply Kits and Equipment to upgrade the motorcycles to BS-VI Category. Nevertheless, due to the inability of Defendant No. 1 to supply the same, the plaintiff’s business was stalled and is said to have sustained substantial loss, following which, the plaintiff terminated the dealership of Defendant No. 1 on 14.09.2020 alleging breach of obligations and sought recovery of monies invested by way of filing the present Commercial Original Suit (Com. O.S.) No. 372 of 2021 claiming a sum of Rs. 1,78,03,090/- (Rupees One Crore Seventy-Eight Lakhs Three Thousand Ninety Only) from Defendant No. 1 with an Interest of 18% (Eighteen Percent) and Rs. 7,06,900/- (Rupees Seven Lakhs Six Thousand Nine Hundred Only) from Defendant No. 2 with an Interest of 18% (Eighteen Percent) till the realization of payments along with 3 (Three) Interim Applications (IAs) No. I to III.

(3)      The defendant no/1 was duly served and hence appeared on 07.08.2021, but, still, did not file the Written Statement on the said date. Later on, the defendant no. 1 had moved an I.A. No. IV seeking extension of time to file Written Statement on 07.09.2021. However, in the meanwhile, the 3 (three) I.As which were filed with Com. OS No. 372 of 2021, were decided vide order dated 30.10.2021 wherein, IA No. 1 which sought direction to defendant no. 1 to take back the remaining motorcycles from possession of plaintiff was allowed, but the other two IAs which had sought for mandatory injunction against Defendant No. 1 & 2, respectively, to refund the monies were directed to be kept in abeyance for consideration along with main suit since the nature of relief was that of final in nature.

(4)      That on 14.11.2021, the time period of 120 days as prescribed under the law for filing Written Statement in a commercial suit had expired. The defendant No. 1 again preferred I.A. No. 5 under section 148 of the Code of Civil Procedure, 1908 seeking extension of time to file Written Statement. The plaintiff filed its objection to the application with another application under section 151 of CPC, thereby  seeking to strike out the defence. However, while the said applications were pending in objections, the defendant no. 1 on 07.01.2022 preferred yet another application along with Written Statement, seeking permission to file the same by seeking condonation of delay on the premise that the delay was due to non-residing of the defendant no. 1, in Bengaluru and COVID-19. The said IA came to be Rejected by order dated 22.03.2022 by the Trial Court and consequently, the Written Statement also came to be rejected. The Defendant No. 1 challenged the order of dismissal of IA by way of Commercial Appeal bearing No. 189 of 2021.

(5)      In the meanwhile, the Written Statement on behalf of Defendant No. 2 was also taken as NIL. The suit progressed subsequently to the stage of recording plaintiff’s evidence and on 30.07.2022, 10.08.2022 and on 19.08.2022 the examination-in-chief of PW1 was recorded and cross-examination of the defendant was taken as NIL by the Trial Court on the ground that defendant had failed to file their Written Statement within Stipulated time and the matter was posted for defendant’s evidence.

(6)      That eventually, the suit came to be partly decreed on 15.11.2022 wherein Defendant No.1 was directed to pay sum of Rs. 1,78,03,090/- (Rupees One Crore Seventy-Eight Lakhs Three Thousand Ninety Only) and Defendant No. 2 was directed to pay Rs. Rs. 7,06,900/- (Rupees Seven Lakhs Six Thousand Nine Hundred Only) with future interest of 9% (Nine Percent) per annum each from the date of suit till realization.

In the backdrop of the judgement and decree, the Commercial Appeal No. 189 of 2022 came to be dismissed as withdrawn.

The defendant No.1, being aggrieved by the judgement and decree of the Trial Court preferred Commercial Appeal No. 19 of 2023 before the Karnataka High Court and that came to be dismissed by the Impugned Order dated 20.05.2025.

Hence, the present appeal was preferred.

                             SUBMISSIONS of appellant (defendant no.1)

(i) The error in the impugned judgment loom large as the court below erred in rejecting the written statement dated 07.01.2022 which is in contravention of the orders passed by the Supreme  Court in Suo Moto Writ Petition (C) No. 3 of 2020 extending the limitation due to COVID-19 wherein the limitation period between 15.03.2020 to 28.02.2022 was waived off in all cases, including commercial disputes. The reliance was also placed on Babasaheb Raosaheb Kobarne & Anr. v. Pyrotek India Private Limited and Ors. 2022 SCC SC 1315 and Prakash Corporates v. Dee Vee Projects Limited (2022) 5 SCC 112.16.

(ii) The failure on the part of the defendant to file the Written Statement within the time permitted by the court would not tantamount to pronouncement of judgment against the defendant. In this context reliance was placed on Asma Lateef v. Shabbir Ahmad (2024) 4 SCC 696.17. The reliance was also placed on the decision of Supreme Court  in Ranjit Singh v. State of Uttarakhand, 2024 INSC 724 that even without filing of written statement, the right to cross-examine survives and not permitting the same has resulted in petitioner’s substantial rights being defeated without adjudication on merits.

(iii) The Order VIII Rule 10 CPC does not empower the court to automatically pass a decree, merely, because a written statement is not filed. The court must still assess whether a prima facie case is made out and in the present case, the decree was passed summarily without such satisfaction being recorded.

(iv) If the impugned decree is executed, it would cause severe and irreparable loss to the petitioner despite him not having had a fair opportunity to contest the claim and it is settled principle that procedural rules must not be used to defeat substantial justice.

SUBMISSION ON BEHALF OF THE RESPONDENT NO. 1- PLAINTIFF

(i) That the right of cross-examination on the part of defendant No. 1 stood forfeited on account of non-filing of written statement. It was rightly held by the high court that despite repeated and adequate opportunities afforded to the defendant No. 1, he wilfully chose not to exercise his right of cross-examination.

(ii) At no stage, during the proceedings before the trial court, did the defendant no. 1 Company opted to file an application for recall of the order closing the stage for cross- examination of PW1 nor did it file any appeal or writ petition challenging such order of closing the stage. The defendant No.1 had therefore acquiesced and is now estopped from raising such plea at this belated stage especially when defendant no. 1 did not take such a ground even in the memo of appeal.

(iii) The conduct of the defendant before the courts below revealed a syndrome of dilatory tactics, false pleadings, and abuse of process. The defendant no.1 failed to file the written statement within the statutory period and did not avail the opportunity of cross-examination and never challenged the orders closing its right to cross-examination at the first instance.

(iv) The present appeal is only a last-ditch attempt to obstruct & delay the lawful execution of the decree.

ISSUE FOR CONSIDERATION

The Supreme Court had issued notice, only the following issue:

“Whether the High Court was correct in observing that on account of non-filing of written statement by the defendant, his right to cross-examination is taken away?”

It was noted by the Supreme Court as per the chronology, that, though, the summons was served upon the defendant no. 1 company on 17.07.2021, they could not file the Written Statement up till 07.01.2022 which was long after the statutory period of 120 days had already expired on 14.11.2021. The law regarding the mandatory filing of Written Statement in a commercial dispute within the statutory period is clearly envisaged under Proviso to sub-rule (1) of Rule 1 of Order VIII Code of Civil Procedure, 1908 (CPC) and Second Proviso to Sub-rule (1) of Rule 1 of Order V CPC as amended by the Special Amendment under the Commercial Courts Act, 2015 is well settled. The said provisions impose an absolute embargo upon the courts to accept the written statement after the expiry of one hundred twenty (120) days. The said provisions may be perused as under:

“1. Written Statement —The defendant shall, within thirty days from the date of service of summons on him, present a Written Statement of his defence:

Provided that where the defendant fails to file written statement within the said period of thirty days, he shall be allowed to file the written statement on such other day, as may be specified by the court, for reasons to be recorded in writing and on payment of such costs as the court deems fit, but which shall not be later than one hundred twenty days from the date of service of summons and on expiry of one hundred twenty days from the date of service of summons, the defendant shall forfeit the right to file the written statement and the court shall not allow the written statement to be taken on record.”

In SCG Contracts (India) Pvt. Ltd. v. K.S. Chamankar Infrastructure Private Limited and Ors. (2019) 12 SCC 210 27 the Supreme Court has already fortified the mandatory nature of statutory period in filing WS in a commercial dispute and it was held that that timeline of 120 days’ fixed by the statute is not directory but rather mandatory, therefore, commercial courts cannot condone the delay beyond 120 days in filing the WS. However, the Supreme Court has proceeded further to hear the appeal in view of some other vital aspect and that could not have been brushed aside . The meticulous scrutiny of the chronological chart as mentioned supra shows that the limitation period for filing the WS commenced on 17.07.2021 and ended on 14.11.2021. It was held that both these dates fell at a time when our nation was in garb of global pandemic of COVID-19 which affected the lives of millions of people around the world as well our judicial systems. This court was conscious of the fact as to the difficulty faced by the litigants in approaching the courts physically and was of the view that the said pandemic should not become the reason to vandalise the rights of the litigants due to expiry of period of limitation who could have approached the court well within the time had it not been for the pandemic. Hence , the Supreme Court, In Re: Cognizance for Extension of Limitation (2022) 3 SCC 117 in Suo Moto Writ Petition (C) No. 3 of 2020 by exercise of its powers under Article 142 of the Constitution of India passed series of orders to exclude the period commencing from 15.03.2020 till 28.02.2022 for the purpose of computing the limitation period under any general or special laws in respect of all judicial or quasi-judicial proceedings. For the purpose of reference, the relevant portion of the order is extracted below:

“ I. The order dated 23.03.2020 is restored and in continuation of the subsequent orders dated 08.03.2021, 27.04.2021 and 23.09.2021, it is directed that the period from 15.03.2020 till 28.02.2022 shall stand excluded for the purposes of limitation as may be prescribed under any general or special laws in respect of all judicial or quasi judicial proceedings.

II. Consequently, the balance period of limitation remaining as on 03.10.2021, if any, shall become available with effect from 01.03.2022.III. In cases where the limitation would have expired during the period between 15.03.2020 till 28.02.2022, notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90 days from 01.03.2022. In the event the actual balance period of limitation remaining, with effect from 01.03.2022 is greater than 90 days, that longer period shall apply

 

The Supreme Court has also held in Aditya Khaitan & Ors. v. IL & FS Financial Services Limited 2023 INSC 867 in a  similar situation, wherein, the High Court had disallowed the appellant to file the Written Statement in a commercial dispute on the premise that the same was beyond the mandatory statutory period of 120 days. This Court while relying upon the orders passed In Re: Cognizance for Extension of Limitation (Supra) allowed the appeal and directed the Written statement to be taken on record. Further, again in Babasaheb Raosaheb Kobarne & Anr. v. Pyrotek India Private Limited & Ors. 2022 SCC OnLine SC 1315 and Prakash Corporates v. Dee VeeProjects Limited (2022) 5 SCC 112 had allowed the appellant to file its written statement notwithstanding the fact that it was filed beyond the period of 120 days in the light of the COVID-19 pandemic, wherein the period of limitation was extended.

          The SUO MOTO exemption shall be applicable in all cases

It was thus held by the Supreme Court in Anvita Auto Tech Works Pvt. Ltd. (Supra), that the statutory period of 120 days commenced from date of service of summons on 17.07.2021 and as per section 9 of the General Clauses Act, 1897, the date of service had to be excluded therefore, from 18.07.2021, the 120 days’ period commenced and it ended on 14.11.2021. In the light of aforesaid discussion, it can be very well said that both the dates fell within the sweep of period between 15.02.2020 to 28.02.2022. In fact, during this period itself, to be precise on 24.11.2021 itself defendant No.1 had filed I.A. No.5 seeking enlargement of time to file written submission and subsequently on 07.01.2022 had filed IA No.VI/ 6A seeking permission to file written submission enclosing the written submission also. It was thus held that the High Court ought to have excluded the aforesaid period for the purpose of filing the written statement and ought to have permitted the defendant No.1 to file written statement on record and contest the suit on merits rather than dismissing the appeal.

                   RIGHT TO CROSS EXAMINATION shall continue

Moreover, the perusal of the records particularly, the order sheet of the trial court dated 19.08.2022 clearly reveal that after the examination-in-chief of PW1 was closed, the cross-examination of Defendant no. 1 was taken as “NIL” on the ground that defendant had failed to file their written statement within stipulated time. It was held that that the said reason is absolutely perverse and is contrary to the right of defence available to the defendant. The purpose of cross-examination is to elicit the truth from the witness and impeach its credibility. When the WS was not allowed to be taken on record, the denial of the right to cross- examine cannot be taken away by leaving the defendant in lurch and this has acted as final nail in the coffin to defendant’s right of defence. It was also held in Ranjit Singh v. State of Uttarakhand, 2024 INSC 724 that even when the defendant has not filed the Written statement, his right to cross-examine the plaintiff witnesses is not foreclosed. The relevant portion of the decision for easy reference is extracted herewith:

“5…….At this stage, we must clarify the legal position. Even if a defendant does not file a written statement and the suit is ordered to proceed ex-parte against him, the limited defence available to the defendant is not foreclosed. A defendant can always cross-examine the witnesses examined by the plaintiff to prove the falsity of the plaintiff’s case. A defendant can always urge, based on the plaint and the evidence of the plaintiff, that the suit was barred by a statute such as the law of limitation…..”

Thus, in the light of the aforesaid discussion, the Supreme Court was pleased to allow the appeal and consequently, the impugned judgment dated 20.05.2025 in Commercial Appeal No. 19 of 2023 and consequently the judgment and decree passed in commercial suit No.372/2021 by the Addl. City Civil and Sessions Judge (Exclusive Commercial Court) dated 15.11.2022 quo defendant No.1 (Appellant herein) was set aside and the matter was remanded back to the trial court to dispose of the same after allowing the appellant herein to file the Written Statement subject to payment of cost to the tune of Rs. 1,00,000/- (Rupees One Lakh Only) and to permit the appellant to exercise his right of cross-examination of plaintiff’s witnesses. The trial court was directed to dispose of the present commercial suit expeditiously and preferably within a period of Six (6) months.

                                      ------

                                      Anil K Khaware

    Founder & Senior Associate

    Societylawandjustice.com

 

 

Section 138 of NI Act: Can there be piecemeal settlement with one accused director/partner?

 

Section 138 of NI Act: Can there be piecemeal settlement with one accused director/partner?

The section 138 -147 of Negotiable Instruments Act 1881 (as amended and up to date) is a code in itself, in a sense, that myriads of issues are raised, while the process of trial begins and in the touchstone of law, the issues are deliberated and settled and judgments are passed. The discussion herein , however, shall be in narrow compass. What shall be the situation, if, in case of an accused  company, there are two directors representing the accused company and are arrayed as  a party, for their defining roles in issuing cheques and it is dishonoured for “insufficient funds”? Whether, the complaint can be settled in piecemeal manner with a Director/accused by receiving part of the cheque amount from one accused/director and whether, in such circumstances, the complaint against the other director could continue? In other words, if only part of the cheque amount could be paid by one of the director and the said director persuades the complainant, that he, having paid the dues towards his liability, the disputes could be compounded qua him and the complainant for remaining claim could pursue the complaint, against the other directors. Similarly, as a corollary, in case of an accused being a partnership firm, one of the partners pays part of the cheque amount, ostensibly part of his liability, while impressing upon the complainant to pursue the case against the other partner, allegedly, qua his share. Whether such a settlement, so to say, a piecemeal settlement u/s 138 of Negotiable Instruments Act, shall pass muster, and if it does, whether such complaints could be compounded against such partner/director and qua the alleged shares of other director/partner whether the proceedings could continue has been a moot point to deliberate herein.

Most recently, the Delhi High Court had dealt with such a situation in a matter reported as CRL.M.C. 2928/2021 & Crl.M.A. 18466/2021 SATISH KUMAR PAWA Vs STATE OF NCT OF DELHI

                   FACTS AS A PRELUDE TO THE PETITION

(i)       A petition was preferred by the accused partner under Section 482 of the Code of Criminal Procedure, 1973 against the Order dated 02.07.2019 of the learned ACMM, whereby Complaint under Section 138 of the Negotiable Instruments Act, 1988 filed by the Complainant in respect of dishonor of cheque of Rs.50 Lacs against the partners/Partnership Firm, was compounded qua one of the Partner, on receiving of Rs.25 Lacs from him, but continued against the second Partner/ Petitioner. The petitioner had challenged the order of partial compounding, on the premise that the liability of the two accused/ partners of the Partnership Firm (unregistered) was joint and several and thus, compounding in piecemeal manner, should not have been permitted. The petitioner had therefore, preferred the quashing of the Complaint against himself in terms of compounding of the offence. being the Partner of the Firm.

(ii)      To elucidate further, the complaint was  filed under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881 against Petitioner and Respondents No.3 & 4 i.e other partners. The ld  Metropolitan Magistrate took cognizance of the Complaint and issued summons to all the accused persons, namely, Petitioner, Respondent No.3/M/s Jagat Overseas and Respondent No.4/Mr. Sant Lal Aggarwal, on 19.11.2015, in response to which, Petitioner and Respondent No.4 appeared before the learned MM. The learned MM vide Order dated 07.03.2018 observed that “as unregistered partnership firm is only a compendious name under which the activity of the firm carried out and it is not a legal entity with respect to an unregistered partnership firm with respect to any act or omission attributable act the partners would be liable”.

(iii)      The notice under Section 251 Cr.P.C for the offence under Section 138 of the Negotiable Instruments Act, was framed against Satish Kumar Pawa and Sant Lal Aggarwal, the two Partners and not against the Firm, to which they pleaded not guilty. However, at the stage of Complainant’s evidence, the parties entered into settlement and eventually settlement was arrived at between the complainant and Respondent No.4/Sant Lal Agarwal. As per the settlement Rs 25,00,000/- was payable by the said accused and a sum of Rs.25,00,000/-, out of which Rs.20,00,000/- stood already paid and balance Rs.5,00,000/- was paid before the learned MM. The Complainant thus, compounded the offence under Section 138 N.I. Act qua Respondent No.4/Sant Lal Agarwal, who was acquitted of the offence. However, the Complaint was continued against the Petitioner Satish Kumar Pawa, the second Partner, even after compounding of the offence.

Aggrieved, the petitioner had filed Petition seeking quashing of the Complaint under Section 138 read with Section 141 Negotiable Instruments Act, 1881 asserting that in view of Orders dated 07.03.2018 and 02.07.2019, the Complaint does not survive on account of compounding on behalf of the Partnership Firm.

                             TERMS OF SETTLEMENT

It is of pertinence to refer to terms of settlement before going further. The relevant part of Settlement Agreement reads as under:

“1. It is agreed between the parties that respondent no.2/Santlal Agarwal being an equal partner of respondent no. 1 firm, shall pay a sum of Rs. 25,00,000(Rupees Twenty-Five Lakh only) which is half of the total dishonoured cheque amount, to the complainant, towards full and final settlement of all disputes/claims arising out of instant complaint case against him.

2. It is further agreed between the parties that respondent no.2/Santlal Agarwal shall pay the aforesaid settled amount to the complainant in five equal monthly instalments of Rs. 5,00,000/-(Rupees Five Lakh only) each, by way of demand draft, before the referral court on 21st day of every English calendar month. The instalments would commence from January, 2019 itself. In case of holiday, the payment shall be made on the next working day.

3. It is agreed between the parties that in case of default, the respondent no.2 shall pay a sum of Rs. 15,000/- on one default and in case of second default, the settlement shall be revoked.

4. It is agreed between the parties that after realization of the aforesaid settled amount, the complainant shall be left with no claim/dues/ criminal or civil liability whatsoever against the respondent no.2/Santlal Agarwal qua the instant complaint case and he shall withdraw his claim against respondent no.2 accordingly. The complainant shall not recover the civil liability and criminal liability from the respondent ·no.2 in the present case and he shall also not file any claim against respondent ·no.2 with regard to the instant matter.

5. Both the parties have agreed on each and every term. recorded in the settlement agreement, after carefully reading over and fully understanding and appreciating the contents, scope and effect thereof as also the consequences of the breach thereof.

6. The terms have been settled between the parties of their own free will, volition and consent and without there being any undue pressure, coercion, influence, misrepresentation or mistake (both of law and fact), · in any form, whatsoever, and the settlement agreement has correctly recorded the said agreed terms.

7. Both the parties undertake that they will abide by and be bound by the agreed terms/stipulations of the settlement agreement.”             

CONTENTIONS OF THE PETITIONER

(i) The Petitioner had been impleaded as an accused by virtue of Section 141 of the N.I. Act, making him vicariously liable for the offence committed by the Partnership Firm; unless it is determined that the offence has been committed by the Partnership Firm, he as Partner, cannot be held liable for the offence.

(ii) Consequent upon acquittal of Respondent No.4 vide Order dated 02.07.2019, the Complaint does not survive against the Petitioner,  and the Complaint cannot be proceeded with against the Officers, Director of the Companies and Partners of the Firm.

(iii)  Admittedly, the cheque in question had been signed by Respondent No.4 on behalf of Respondent No.3/M/s Jagat Overseas, the Partnership Firm. Further, to secure the payment of the cheque amount, Respondent No.4 had signed the Promissory Note in favour of the Complainant. Since the offence has already been compounded with Respondent No.2 and he has been acquitted, no trial can proceed against the Petitioner alone and he cannot be held liable under Section 138 of the Act.

(iv) No loan was advanced by the Complainant to the Partnership Firm; rather it was the amount paid in discharge of its liability towards supply of rice/paddy. The mala fide Act of Respondent No.4 cannot be held binding upon the Petitioner. No letter was ever sent by the Firm to the Complainant qua admission of its liability. Neither the Partnership Firm nor the Petitioner had received the alleged legal Notice dated 18.04.2015 sent by the Complainant.

(v) The Respondent No.4 has in mala fide manner acted against the interest of Partnership Firm. The alleged Loan transaction and the issuance of Promissory Note was done by Respondent No.4, without prior consent of the Petitioners, which is in contravention of the terms and conditions of Clause-10 of Deed of Partnership dated 01.01.1995. Therefore, the sole responsibility of the transaction was on Respondent No.4, against whom the offence has already been compounded and the Complaint does not survive against the Petitioner.

(vi) The Petitioner and Respondent No.4 are the Partners having equal share in the ratio of 50% each. However, he has never been engaged in the day-to-day affairs of the Partnership Firm. Furthermore, the Petitioner at the relevant time and even as on given dates, did not have access to the place of business. For these illegal and mala fide acts of Respondent No.4, the Petitioner has already preferred Arbitration proceedings, which have been stayed by the Supreme Court.

(vii) The reliance were placed in support of a judgment reported as  Dilip Hariramani Vs. Bank of Baroda, 2022 SCC OnLine SC 579.

 Hence, a prayer is made for quashing of the Complaint.

                             SUBMISSIONS OF THE COMPLAINANT

(i)       The Petitioner is admittedly one of the partners and the second partner Mr. Sant Lal Agarwal, have 50% share in Respondent No.3/Firm, which has not been disputed. He admits himself to be one of the Partnership Firm and is responsible for day-to-day affairs of the Firm; he may have separate action against Respondent No.4 in regard to his acting against the interest of the Firm, but the Complainant has no concern with it as he had dealt with the Firm through its Partner/ Respondent No.4.

(ii)      The assertion that since no separate Notice under S.251 NI Act has been framed on the Partnership Firm, he cannot be held vicariously liable for the acts of the Firm, is also not tenable under Law as being a Partner in the Firm, he has equal responsibility for the affairs of the Partnership Firm.

(iii)      On behalf of the Complainant that under Section 257 Cr.P.C., it is the discretion of the Complainant to withdraw the Complaint against one or the other accused persons. The Complainant has exercised his discretion under Section 257 Cr.P.C. and withdrawn the Complaint against one Partner on account of settlement with him.

(iv)      As per Section 25 of the Partnership Act, 1932 clearly enjoins that the liability of each partner is joint and several. Therefore, the Petitioner being a partner in the Partnership Firm, is severally liable for the amount due from the Firm.

Therefore, it was submitted that the impugned order does not suffer from any infirmity and the present petition should be dismissed.

The core legal issue

(A)      whether in a case under Section 138 of N.I. Act, against the Partnership Firm, compounding by one partner would be in discharge of the entire liability of the Partnership Firm or it can be apportioned to the partners individually?

(B)      Whether a Partnership Firm is a legal entity, which can sue or be sued in its own name?

(C)      Whether compounding of Offence by one Partner would result in complete discharge of the Liability of the Partnership Firm against all the Partners?

In the light of the core issues, the factual matrix has to be recapitulated. The Complaint under Section 138 of N.I. Act was filed against the Respondent No. 3/M/s Jagat Overseas, the Partnership Firm in which the Petitioner/Satish Kumar Pawa and the Respondent No.4/Sant Lal Agarwal were the two partners, having their share in the ratio of 50:50. The averments in the Complaint were that the Partnership Firm/ Respondent No. 3/M/s Jagat Overseas, had issued Post-dated Cheque of Rs. 50,00,000/- under the signatures of Respondent No. 4/Sant Lal Agarwal, the partner, drawn on State Bank of India, which on presentation, was dishonored for “funds insufficient”.

The Cheque in question, that the liability incurred was by the Partnership Firm and the Cheque had also been issued for and on behalf of the Partnership Firm under the signatures of Respondent No.4 Sant Lal Agarwal, one of the partners.

The moot point was that whether a criminal case can be filed against an unregistered Partnership Firm. The  Section 69 of the Partnership Act provides for the effect of non-registration. Clause (2) of Section 69 states that no Suit to enforce a right arising from a Contract, shall be instituted in any Court by or on behalf of a Firm against any third party unless the Firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the Firm. Section 69 of the Partnership Act clearly stipulates the filing of Suits which are confined to proceedings under Code of Civil Procedure and not to criminal offences. The word “Suit‟ in common parlance means a process instituted in the Court for recovery or protection of right or enforcement of a claim or redressal of civil injuries. It does not encompass any criminal liability.

The Section 142 of N.I. Act deals with “cognizance of offence‟ and provides that the Complaint under Section 138 of NI Act in writing, can be made by the Payee or holder in due course. The Legislature in its wisdom, has used the word ‘Complaint’ and not ‘Suit’ in Section 142 of N.I. Act thereby indicating that the bar created for maintaining a Suit in Section 69 of the Partnership Act by or against an unregistered Firm, cannot be stretched and applied to maintain a criminal proceeding under Section 138 of N.I. Act.

                             LEGAL PRECEDENTS

The Supreme Court in B.S.I. Ltd. and Another vs. Gift Holdings Pvt. Ltd. and Another, 2000 SCC (Cri) 538, interpreted the word “Suit’ while deciding maintainability of a proceeding under Section 138 of NI Act in the context of ban imposed by the Sick Industrial Companies (Special Provisions) Act. It provides that no Suit for Recovery of Money or Enforcement of any security against the Industry, Company or Guarantee in respect of any loan or advance granted to the Industrial Company shall lie if in respect of the Industrial Company, an inquiry under Section 16 is pending or any scheme referred to under Section 17, is under preparation or consideration. The Court observed that the word “Suit‟ envisaged in Section 22(1) cannot be stretched to criminal prosecution as it is neither for recovery of money nor for enforcement of any security, etc. Section 138 of NI Act is a penal provision for commission of an offence which entails conviction and sentence on proof of the guilt in duly conducted criminal proceedings. Once the offence under Section 138 of NI Act is completed, the prosecution initiated is not for recovery of the amount covered by the Cheque, but for bringing the offender to penal liability.

The registration or non-registration of the Partnership Firm would have no bearing insofar as Section 141 of NI Act is concerned. The same has been held by the Karnataka High Court in the case of Gowri Containers vs. S C Shetty, ILR 2007 Kar 4586.

The Kerala High Court in Abdul Gafoor vs. Abdurahiman, 1999 (4) Crimes 98, held that Section 138 is not a Suit and the bar of Section 69(2) of the Partnership Act would not operate in such cases. It was further observed that the effect of non-registration of a Partnership Firm, is applicable only to the cases involving civil rights and has no application to criminal cases.

It was therefore held by the hon’ble Delhi High Court in SATISH KUMAR PAWA  (Supra)  on the basis of the aforesaid discussion that the Complaint under Section 138 of NI Act was not maintainable as the Partnership Firm was unregistered, is not tenable in law.

 

B. Whether a Partnership Firm is a legal entity, which can sue or be sued in its own name?

It is a matter of record that M/s Jagat Overseas was a Partnership Firm, in discharge of whose liabilities, the Cheque had been issued under the signatures of Respondent No. 4/Sant Lal Agarwal. It is not in dispute that the Complaint under S.138 NI Act was filed against the Respondent No. 3/M/s Jagat Overseas and the two Partners. The Section 141 of N.I. Act provides that where offences are committed by the Company, then every person at the time of offence committed was in charge of and was responsible to the Company for the conduct of its business as well as the Company shall be deemed to be guilty of the offence.

Explanation to Section 141 reads as under: -

“Explanation.— (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.”

Section 141 of N.I. Act read with Explanation, therefore, makes it abundantly clear that when an offence is committed by a Company or a Firm, every member who is responsible and in charge of the affairs of the Company/Firm is guilty of the offence committed under Section 138 of NI Act.

The situation, though , became somewhat piquant owing to the fact that the ld Metropolitan Magistrate, while framing a Notice under Section 251 of Cr.P.C., 1973 on 07.03.2018, observed that the Partnership Firm is not a separate entity but it is only a compendium of persons, and did not frame a Notice against the Partnership Firm, but only against Respondent No. 4/Sant Lal Agarwal and the Petitioner/Satish Kumar Pawa separately by describing them as the partner of the Respondent No. 3/M/s Jagat Overseas.

                                      LAW

Thus, the Notice under Section 251 N.I. Act was framed on 18.04.2018 only against the two partners and not the Partnership Firm, which has not been challenged by either Party. The Supreme Court in Aneeta Hada vs M/s Godfather Travels & Tours Pvt. Ltd., AIR 2012 SC 2795, after referring to judgments in Iridium India Telecom Ltd. v. Motorola Inc and Ors., 2004 (1) BOM CR 479 and Standard Chartered Bank and others v. Directorate of Enforcement and others, AIR 2006 SC 1301, has observed that :

“the Company can have criminal liability and further, if a group of persons that guide the business of the companies have the criminal intent, that would be imputed to the body corporate. In this backdrop, Section 141 of the Act has to be understood. The said provision clearly stipulates that when a person which is a Company commits an offence, then certain categories of persons in charge as well as the Company would be deemed to be liable for the offences under Section 138. Thus, the statutory intendment is absolutely plain.”

According to the Supreme Court “for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative.”  The relevant paras of the judgment are reproduced as under: -

“the common proposition of law that has emerged for consideration is whether an authorised signatory of a company would be liable for prosecution under Section 138 of the Negotiable Instruments Act, 1881 (for brevity 'the Act') without the company being arraigned as an accused. Be it noted, these two appeals were initially heard by a two-Judge Bench and there was difference of opinion between the two learned Judges in the interpretation of Sections 138 and 141 of the Act and, therefore, the matter has been placed before us.

It is to be borne in mind that Section 141 of the Act is concerned with the offences by the company. It makes the other persons vicariously liable for commission of an offence on the part of the company. As has been stated by us earlier, the vicarious liability gets attracted when the condition precedent laid down in Section 141 of the Act stands satisfied. There can be no dispute that as the liability is penal in nature, a strict construction of the provision would be necessitous and, in a way, the warrant”. 

The supreme court while applying the doctrine of strict construction has held that “ we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others. Thus, the words "as well as the company" appearing in the section 8 make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. One cannot be oblivious of the fact that the company is a juristic person and it has its own respectability. If a finding is recorded against it, it would create a concavity in its reputation. There can be situations when the corporate reputation is affected when a Director is indicted. [59] In view of our aforesaid analysis, we arrive at the irresistible conclusion that for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the drag-net on the touchstone of vicarious liability as the same has been stipulated in the provision itself. We say so on the basis of the ratio laid down in C.V. Parekh [(1970) 3 SCC 491] which is a three- Judge Bench decision. Thus, the view expressed in Sheoratan Agarwal [(1984) 4 SCC 352], does not correctly lay down the law and, accordingly, is hereby overruled. The decision in Anil Hada [(2000) 1 SCC 1] is overruled with the qualifier as stated in paragraph 37. The decision in Modi Distilleries [AIR 1988 Supreme Court 1128] has to be treated to be restricted to its own facts as has been explained by us hereinabove.”

The Supreme Court has reiterated in Anil Gupta vs Star India Pvt. Ltd., 2014 (10) SCC 373, Himanshu vs B. Shivamurthy & Anr., (2019) 3 SCC 797, and recently in Bijoy Kumar Moni vs Paresh Manna & Anr., 2024 INSC 1024.

What therefore emerged is that it is settled that in the absence of Company being arraigned as an accused, the Directors cannot be held liable for the offence committed by a company. Since the Notice under S.251 Cr.P.C. has not been framed against the Partnership Firm, this itself is a sufficient ground for discharge of the Petitioner.

 

C. Whether compounding of Offence by one Partner would result in complete discharge of the Liability of the Partnership Firm against all the Partners?

According to the petitioner, the Partnership Firm defines the group of persons who form a Partnership Firm and the liability of the partners is joint and several and thus, compounding done by one partner for the liability of the Partnership Firm, would result in compounding of the entire case and cannot be apportioned to the Partner who was not a party to the compromise, by leaving his liability to the extent of his share in the Partnership Firm.

In the present case, one partner, the Respondent No. 4/Sant Lal Agarwal has compromised the matter with the Complainant vide Mediated Settlement Agreement dated 17.01.2019, wherein the Respondent No. 4/Sant Lal Agarwal, being equal partner of Respondent No. 3/M/s Jagat Overseas, the Partnership Firm, agreed to pay a sum of Rs. 25,00,000/- which is half of the dishonored cheque amount, to the Complainant “towards full and final settlement of all disputes/claims arising out of instant complaint case against him”. The said Compromise has been accepted by the learned Metropolitan Magistrate vide Order dated 02.07.2019 and the case has been directed to be continued against the Petitioner/Satish Kumar Pawa.

The question arise as to whether such partial compounding by one partner for the liabilities of the Partnership Firm, would result in total discharge of all liabilities or it can be apportioned in the manner it was done by the Respondent No. 4/Sant Lal Agarwal and the Complainant?.

To delve the issue further, it is worthwhile to refer to  Section 25 of the Partnership Act which provides that 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. It reads as under:

“25. Liability of a partner for acts of the firm: - 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 Firm is not a legal entity; it is a collective or compendious name for all the partners. In other words, a Firm does not have any existence away from its partners, though by virtue of S.141 NI Act, it can be sued in its name. A Decree in favour of or against a Firm has the same effect as a Decree in favour of or against the partners. When the Firm incurs a liability, it can be assumed that all the partners were incurring that liability and so the partners remain liable jointly and severally for all the acts of the Firm. Therefore, the liability of the partners is joint and several.

In Ashutosh vs State of Rajasthan & Ors., AIR 2005 SC 3434, it had been observed by the Supreme Court that it is open to a creditor of the Firm to recover the debt from any one or more of the partners. Each partner shall be liable as if the debt of the Firm has been incurred on his personal liability.

Therefore, when there is a compromise by one partner, it has to be for and on behalf of the Partnership Firm and there cannot be any partial settlement with one partner, as has been done in the present case.

The Complainant has sought to justify partial compounding and the withdrawal of the Complaint qua Respondent No. 4 under Section 257 of the Cr.P.C. which empowers withdrawal of Complaint against one or more accused persons.

Sections 257 of Cr.P.C. reads as under:

“257. Withdrawal of complaint — If a complainant, at any time before a final order is passed in any case under this Chapter, satisfies the Magistrate that there are sufficient grounds for permitting him to withdraw his complaint against the accused, or if there be more than one accused, against all or any of them, the Magistrate may permit him to withdraw the same, and shall thereupon acquit the accused against whom the complaint is so withdrawn.”

The Delhi High Court in SATISH KUMAR PAWA (Supra) has held as under:

“59.No doubt, Section 257 empowers a Complainant to withdraw the case on sufficient grounds against ‘all or any of the accused persons’, but it has to be understood in the right perspective. As already discussed above, the liability was that of the Partnership Firm, against whom, in the first instance, the Notice under Section 251 of Cr.P.C. has not been framed. Furthermore, as already held above, the liability was that of the Partnership Firm for which both Respondent No. 4/Sant Lal Aggarwal and the Petitioner/Satish Kumar Pawa were jointly and severally liable for the liability incurred by the Firm. The Settlement with one partner could not have been apportioned in the manner it has been done in the present case”.

60. Consequently, when the Complaint is withdrawn under Section 257 by the Complainant as against Respondent No. 4/Sant Lal Aggarwal, the same is essentially withdrawn against the Partnership Firm, which is originally liable for the debt owed to the complainant.

61. In view of Section 25 of the Partnership Act, the Partners, accused persons herein, are jointly and severally liable for the acts of the Partnership Firm/M/s Jagat Overseas.

62.  In the present case, both the partners, namely, Petitioner/Satish Kumar Pawa and the Respondent No. 4/Sant Lal Agarwal, were jointly and severally responsible for the liability incurred by the Partnership Firm, meaning thereby that each is liable for the entire liability individually as well as jointly. The partners may have agreed to be entitled to the share profit & loss in a particular ratio, but their legal liability towards the third person is joint and several and there can be no apportionment.

In the Mediated Settlement Agreement dated 17.01.2019 itself, it has been noted that the Compromise is towards all the existing liabilities of the Partnership Firm which also acknowledges that the payment made by the Respondent No. 4/Sant Lal Agarwal in discharge of his liabilities of the Partnership Firm.

The liability of Sh. Sant Lal was not limited to his 50% as has been erroneously assumed, but is towards the entire liability. Once this compounding has been accepted by the Complainant, the necessary implication shall be that it is for and on behalf of the Partnership Firm.

Therefore, once the matter stands compromised for whatever the amount, the offence is compounded towards all the existing liabilities of the Partnership Firm; nothing survives in the Complaint which has to be necessarily disposed of as compromised against the second partner/Petitioner as well. Thus, Section 257 of Cr.P.C. do not come to the rescue of the Complainant/Respondent No. 2 in the case herein.

The Petition was thus allowed and the Complaint Case No. 10445/2016 under Section 138 of N.I. Act filed by the Respondent No. 2 was quashed/disposed of as compounded and the Petitioner/Satish Kumar Pawa was acquitted.

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                             Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com