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The Bombay High Court has held that prosecution for cheque bouncing cases under Section 138 of the Negotiable Instruments Act (NI Act) will not be hit by the bar created under Section 69(2) of the Indian Partnership Act.
Section 69(2) places a bar on unregistered firms from filing suits to enforce rights arising out of contracts.
The Division Bench of Justices PN Deshmukh and Pushpa Ganediwala was tasked with deciding the following question, which was referred to it by a Single Judge Bench:
Whether prosecution of accused under Section 138 of the Negotiable Instruments Act, 1888, is hit by the bar created by sub-section (2) of Section 69 of the Indian Partnership Act, 1932?
Earlier, a Single Judge Bench of the Bombay High Court, in Sai Accumulator Industies Sangamner v. Sethi Brothers Aurangabad, had held that a complaint filed by an unregistered firm under Section 138 of the NI Act is not tenable in law in view of the bar under Section 69(2).
However, when the present case came up before the referral judge, he had expressed an opposing view, before referring the question to a larger bench.
Arguing before the Division Bench, counsel for the applicant in the present case submitted that almost all high courts had taken the view that prosecution of the accused under Section 138 NI Act is maintainable and is not hit by the bar created by sub-section (2) of Section 69.
Counsel for the respondent supported the view of the Bombay High Court in Sai Accumulator.
After hearing the parties, the Division Bench noted that the decision in Sai Accumulator had relied on a judgment of the High Court of Judicature at Hyderabad that had been overruled by a larger bench of the same High Court in AV Ramanaiah v. M Shekhara, passed in December 2007.
In that case, it was held that the bar contained under Section 69 of the Partnership Act would not get attracted for initiating action by or against an unregistered partnership firm for the offence committed under Section 138 of the NI Act.
The present Division Bench agreed with the AV Ramanaiah verdict, in which it was further held that the bar under Section 69 is intended to prevent an unregistered partnership firm from enforcing a right arising out of a contract against a third party, and that it is not intended to create any such bar for the purposes of enforcing rights arising out of statutes or for invoking the protection available under any other statute.
The Bench held,
"There is no disagreement with the proposition that the 'debt or other liability' as has been referred in Section 138 of the N.I. Act, is a 'legally enforceable debt or other liability'. However, by creating a bar to enforce a right arising out of contract by an unregistered firm, with the object to promote registration of the firms and to exempt the small firms from compulsory registration, the inherent character of enforceability of the 'right' does not get changed and it would still remain as a right enforceable by law. Once the bar is removed, the remedy would be revived."
Noting that Section 138 of the NI Act is a penal provision having the object to inculcate faith in banking transactions, the Bench held,
Bombay High Court
It further noted that when a plaint is rejected being barred by Section 69(2), the same shall not preclude the plaintiff from presenting a fresh plaint in respect of the same cause of action, in view of Order 7 Rule 13 of the Code of Civil Procedure. A similar kind of provision is available neither under the NI Act nor in the Code of Criminal Procedure.
The Bench ultimately answered the reference thus:
"The prosecution of an accused under Section 138 of the Negotiable Instruments Act, 1888, is not hit by the bar created by sub-section (2) of Section 69 of the Indian Partnership Act, 1932.”
[Read the judgment]