Supreme Court: Retired Partner Still Liable Under NI Act if Statutory Formalities Are Not Followed

Introduction

In Shivappa Reddy v. S.Srinavasan[i], the Hon’ble Supreme Court has, while adjudicating upon a criminal appeal, filed against the order passed by the Hon’ble Karnataka High Court, which had quashed the proceedings initiated under the Negotiable Instruments Act, 1881 (‘NI Act’), against one of the partners who had allegedly ceased to be a partner as on the date of the issuance of the cheques, observed that a partner, who has retired, can continue to be held liable under the NI Act, especially when his retirement/cessation of partnership has not been captured in a statutorily compliant manner, as required under the Indian Partnership Act, 1932 (‘Partnership Act’).

Brief Facts

• Shivappa Reddy (‘Appellant’) had filed a complaint under s. 200 of the CrPC against M/s AVS Construction (‘Partnership firm’) and its partners, namely, S.Srinivasan (‘Respondent’), and S. Yuvaraju S. Sundaraiah,  alleging they had dishonoured twelve cheques worth Rs. 50,00,000 each (total Rs. 6,00,00,000) (‘Cheques’) and had thus committed an offence under s. 138 of the NI Act.  

• After taking the preliminary evidence on record, the Trial Court proceeded to issue summons against the accused persons. However, the Respondent moved an application under s. 482 of the CrPC, before the Court, seeking quashing of the NI matter on the basis that he ceased to be a partner of the Partnership firm w.e.f. 01.04.2015. Since the Respondent’s retirement pre-dated the issuance of the Cheques, the proceedings initiated against him were liable to be quashed.

• Notably, the Respondent subsequently filed an application for discharge under s. 239 of the CrPC after the Trial Court had taken cognizance of the offence. However, the discharge application was dismissed by the Trial Court on 01.09.2021; thereafter, the Respondent proceeded to file for quashing before the Court.

• The quashing was allowed by the Court, and accordingly, the proceedings initiated under s. 138 of the NI Act were quashed, against the Respondent, in view of his retirement from the Partnership firm. The Appellant, aggrieved by the passing of the quashing order, proceeded to file an appeal against the same before the Supreme Court.

Issue

Whether the proceedings initiated against the Respondent under s. 138 of the NI Act could have been quashed solely on the ground that he allegedly retired prior to the issuance of the cheque, and hence, no liability could be fastened upon him under the NI Act?

Held

The Supreme Court, while setting aside the quashing order passed by the Court, made the following observations:

• The Respondent had failed to adhere to the mandatory statutory requirements envisaged under Partnership Act and the Respondent, along with other partners had failed to inform the Registrar of Firms about the Respondent’s retirement, as mandated by s. 72 of the Partnership Act, which requires a notice of retirement to be given to the Registrar of Firms under s. 63 and its publication in the Official Gazette, inter alia, certain other statutory liabilities, including the ones mentioned under ss. 32 and 62. In view of this non-compliance, the Respondent could not have been excluded from the case, particularly in light of the law laid down in Seth Radha Kishan v. Administrator, Municipal Committee[ii], wherein the Supreme Court observed that the failure to notify the public and the Registrar about the retirement of a partner can make him liable for future acts of the partnership firm.

• Further, the Supreme Court reiterated that the power conferred upon the High Courts under s. 482 of the CrPC is to be exercised sparingly and only in rare and exceptional cases. It held that in the present matter, the extent of the Respondent’s involvement could only have been determined during the trial, and hence, interference by the High Court at the pre-trial stage was unwarranted.

Our Analysis

This judgment is a valuable reminder that observance of statutory formalities under the Partnership Act is essential, especially when third-party liabilities are concerned. The Supreme Court has clarified that mere signing of the retirement deed or giving intimation to other partners does not discharge a retiring partner from his liability under the NI Act. For successful restriction or exclusion of liability, compulsory procedural requirements like giving notice to the Registrar of Firms and the issuance of public notice are to be complied with.

The Court also asserted the principle of vicarious liability under s. 141 of the NI Act, noting that even if the partner has not signed the cheque that was dishonoured, liability can be imposed on him on account of his role in the conduct of the business of the firm, especially when there are certain averments regarding such involvement made in the complaint.

The decision also creates a significant line of demarcation regarding the exercise of inherent powers under s. 482 of the CrPC, whereby the Supreme Court has reaffirmed that quashing of criminal proceedings at the pre-trial stage has to be exercised judiciously, particularly where the case comprises mixed questions of fact and law. Here, the question of whether the Respondent had properly retired from the firm and whether such retirement was legally binding on third parties requires a trial in its entirety, rather than summary dismissal by the High Court.

In effect, the ruling emphasizes a firm judicial policy that statutory procedures are not voluntary formalities, but protective measures safeguarding third-party interests. It reinforces that retirement inter se partners could be valid, but would be operative as against third parties only if communicated through proper statutory channels.

This judgment is likely to impact future suits under the NI Act against partnership firms and comes as a warning to ‘silent’ or ‘retired’ partners who unilaterally depend on internal deeds without complying with public legal formalities. The requirement of procedural discipline by the Court enhances the integrity of commercial transactions and maintains the faith of third parties in the formalities prescribed by law.

End Notes

[i] 2025 SCC OnLine 1162.

[ii] Firm Seth Radha Kishan v. Administrator, Municipal Committee, AIR 1963 SC 1547.

Authored by Prishita Sadhwani, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.