May 31, 2025 In Advovacy, Blog, Consultancy

SUPREME COURT REAFFIRMS THAT RETIRED PARTNERS OF REGISTERED FIRMS MUST AHDERE TO STATUTORY REQUIREMENTS UNDER THE PARTNERSHIP ACT TO AVOID LIABLITY

In a significant Supreme Court ruling that reiterates the statutory requirements for a partner’s effective retirement from a registered firm, a Bench comprising of Justice Abhay S. Oka and Justice Augustine George Masih in the matter of Shivappa Reddy v. S. Srinivasan (Criminal Appeal No. 4363 of 2024)(Date of Judgement- 19.05.2025) set aside the Karnataka High Court’s Order dated 23.09.2023 that had prematurely quashed proceedings against a partner under Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) by invoking Section 482 CrPC. This Judgment underscores the necessity of strict compliance with the Indian Partnership Act, 1932 when a partner claims to have retired from a firm to avoid legal liability.

 

BACKGROUND AND FACTS

The Appellant filed a complaint under Section 138 of the NI Act for dishonour of twelve cheques amounting to ₹6 crore, issued by Accused No.1, a registered partnership firm. The cheques were signed by one of the partners as an authorised signatory.

Respondent No. 4 and one of the named partners, approached the High Court under Section 482 CrPC, contending that he had retired from the firm on 01.04.2015, well before the issuance of the cheques. He argued that his liability, if any, had ceased and thus the proceedings against him ought to be quashed.

The High Court accepted this plea and allowed the petition, effectively discharging him from criminal prosecution under the NI Act.

 

LEGAL ISSUES BEFORE THE SUPREME COURT

  1. Whether the High Court was right in quashing the criminal proceedings under Section 482 CrPC, based on the Respondent’s claim of retirement.
  2. Whether the Respondent could be held liable under Section 138 read with Section 141 of the NI Act despite alleging retirement.
  3. What constitutes valid retirement of a partner under the Indian Partnership Act, 1932, especially for the purpose of escaping continuing liability?

 

STATUTORY FRAMEWORK: PARTNERSHIP ACT AND NI ACT

The Hon’ble Supreme Court laid particular emphasis on compliance with Sections 32, 62, 63 and 72 of the Partnership Act, 1932, which collectively govern:

  1. The process of valid retirement of a partner;
  2. Intimation to the Registrar of Firms;
  • Public notice requirements in the Official Gazette and local newspapers.

Crucially, the Hon’ble Court held that internal agreements, backdated retirement deeds or private understanding among partners do not absolve a partner of third-party liability unless the statutory public notice and registration formalities are duly completed.

This has direct implications under Section 141 of the NI Act, which attributes vicarious liability to all partners involved in the firm at the time of commission of the offence — unless they can prove otherwise through due compliance with law.

 

SUPREME COURT’S ANALYSIS AND REASONING

Rejecting the High Court’s Order dated 23.09.2023, the Hon’ble Supreme Court made several key observations:

  1. The retirement of the Respondent was neither duly notified to the Registrar of Firms under Section 63, nor published in a vernacular newspaper as required under Section 72.
  2. The certified copy of Form-A from the Registrar’s office, obtained by the Appellant in 2020, still listed the Respondent as a partner, and the entry showing his retirement was made much later — post issuance of cheques and even after the statutory legal notice was sent.
  • The allegations in the complaint, including the Respondent’s participation in the firm’s day-to-day affairs and his assurances regarding repayment, made out a prima facie case under Section 141 NI Act, necessitating trial.
  1. Section 482 CrPC is not meant to adjudicate disputed questions of fact, which are best left to be resolved at trial upon leading evidence.

Accordingly, the Hon’ble Court restored the criminal proceedings observing that the High Court had erred in law and acted beyond its jurisdictional limits.

 

CONCLUSION AND SIGNIFICANCE

The Judgment in Shivappa Reddy v. S. Srinivasan is a timely reminder of the rigorous statutory procedure that must be followed for effective retirement from a registered partnership firm. The Hon’ble Supreme Court has clarified that a partner cannot escape liability merely by asserting retirement unless due public notice and statutory filings have been made in accordance with the Partnership Act.

For practising lawyers, accountants, and firm partners, this decision underscores the importance of compliance-driven exits from partnership firms, particularly in financial transactions that may have criminal consequences. It also strengthens the jurisprudence around Section 141 NI Act, affirming that vicarious liability cannot be brushed aside at the pre-trial stage by relying on self-serving documents.

Importantly, the ruling also serves as a caution against abuse of the High Court’s inherent powers under Section 482 CrPC, especially when material factual disputes exist that require trial.

 

SARTHAK KALRA

Senior Legal Associate

The Indian Lawyer & Allied Services

 

Please log on to our YouTube channel, The Indian Lawyer Legal Tips, to learn about various aspects of the law. Our latest video, titled “Senior Citizens: Legal Rights & Support Systems Explained” can be viewed at the link below:

Leave a Reply