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Supreme Court Restores NI Act Proceedings, Holds Unsubstantiated Retirement No Shield from Partner Liability

The Supreme Court restored proceedings under the Negotiable Instruments Act, holding that an unsubstantiated claim of retirement does not absolve a partner from liability for dishonoured cheques issued by the firm.


The Supreme Court Bench of Justice Abhay S. Oka and Justice Augustine George Masih reviewed a criminal appeal and held that a partner’s liability under Section 138 of the NI Act cannot be negated merely by asserting retirement unless statutory requirements under the Partnership Act—particularly public notice and registration of retirement—are duly complied with; and that such disputed factual issues involving partner liability must be adjudicated through trial, not under Section 482 CrPC.


The Supreme Court allowed an appeal filed by the complainant challenging the Karnataka High Court's order which had quashed criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881, against Respondent No. 4, on the ground that he had retired as a partner from the accused firm prior to the issuance of the dishonoured cheques. The dispute arose out of twelve cheques of ₹50 lakh each, aggregating ₹6 crore, issued by M/s AVS Constructions—a registered partnership firm—signed by its authorised signatory, Accused No. 2, towards the refund of sale consideration. The cheques were dishonoured upon presentation due to stop payment instructions. The complainant initiated proceedings after issuing a statutory notice, which went unheeded.


Respondent No. 4, claiming he had retired from the partnership firm on 01.04.2015, approached the High Court under Section 482 CrPC seeking quashing of proceedings. He contended that he was not liable under Section 138 as he was not a partner on the date the cheques were issued. The High Court accepted this claim, holding that there was no legally enforceable debt against him, and that the cheques were not signed by him.


The Supreme Court, however, held that the statutory requirements under the Indian Partnership Act, 1932—particularly Sections 32, 62, 63, and 72—had not been fulfilled by the Respondent to establish his retirement from the partnership. The Court noted that no public notice of retirement had been published and that the entry of retirement in the Registrar of Firms was made much after the issuance of the cheques and even after the statutory legal notice. It further observed that mere internal agreement or deed of retirement was insufficient to absolve a partner from liability in law, unless the same was duly notified and registered.


The Court also took into account the factual assertions made in the complaint, including the Respondent’s participation in discussions relating to the refund and his presence during the issuance of the cheques, concluding that prima facie liability under Section 141 of the NI Act could not be ruled out. The findings of the High Court were found to be unsustainable as they delved into disputed questions of fact and law, which required evidence and could not be determined summarily in a petition under Section 482 CrPC.


Accordingly, the Supreme Court set aside the High Court's order and restored the criminal proceedings pending before the Trial Court. It clarified that its observations were confined to the jurisdictional scope of the High Court’s powers and would not influence the merits of the case during trial.

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