Proprietorship Has No Separate Legal Identity; Only Proprietor Can Be Held Liable Under Section 138 NI Act: Delhi High Court

The Delhi High Court observed that in case of a Proprietorship concern, it is only the proprietor who can be held liable under Section 138 of the Negotiable Instruments Act (NI Act) since the Proprietorship concern has no separate legal identity.

The Court dealt with the issue wherein Section 138 NI Act proceedings were initiated against the person other than the sole proprietor/signatory of the cheque on the claim that the said person assured the Appellant the payment of money.

The Bench of Justice Shalinder Kaur observed, “It is a settled position of law that in case of a Proprietorship concern, it is only the proprietor who can be held liable under Section 138 of the NI Act since the Proprietorship concern has no separate legal identity. Section 141 of the NI Act does not cover within its ambit the proprietary concern as same is not a juristic person, so as to attract vicarious liability. A Proprietorship firm in fact is a business name of the sole Proprietor, therefore, only the Proprietor can be held liable under Section 138 of the NI Act as the Proprietorship concern and the Proprietor are one and the same.”

Advocate Vishwendra Verma represented the Appellant, while Advocate Roshan Lal Saini represented the Respondents.

Case Brief

The Appellant filed an appeal against the order of trial court for acquitting the Respondents for the offence under Section 138 NI Act. It was the contention of the Appellant that the Appellant and Respondents had entered into a business transaction. A cheque was issued for the amount of Rs.1,10,000/- to the Appellant, however, the same was returned dishonored.

It was requested that no legal proceedings be initiated due to financial constraints and the Appellant was assured that the outstanding amount would be discharged in two instalments. The cheques were again dishonored, thus, the Appellant filed a Complaint under Sections 138/141 of the NI Act along with Sections 420/406 of the Indian Penal Code, 1860 (IPC) before the learned trial court, wherein the Respondents were acquitted by the trial court.

The Respondents contended that the cheque in question was never issued by the Respondent No. 2 and he is not the proprietor.

Court’s Analysis

The Court opined that it is well settled law that in case of a Proprietorship, it is only the proprietor who can be held liable under Section 138 of the NI Act since the Proprietorship concern has no separate legal identity.

The Court held, “A Proprietorship firm in fact is a business name of the sole Proprietor, therefore, only the Proprietor can be held liable under Section 138 of the NI Act as the Proprietorship concern and the Proprietor are one and the same.”

The Court opined that a Proprietary concern stands on an absolutely different footing. A person being the Proprietor thereof would be solely responsible for the affairs and the conduct of a proprietary concern.

Additionally, the court highlighted that Section 138 of the NI Act manifests that it is the drawer of the cheque-in-question, which is liable for punishment as per the provisions of the NI Act. In the given case, the cheque was signed by the proprietor of the sole proprietorship, which was not the Respondent in question.

“In view of the above, the case attempted to be built by the Appellant appears to be suffering from fatal infirmities so much so, it goes directly to the root of the case and shakes the very foundation on which the Appellant’s complaint had been registered. Thus, in the present case, no cause of action accrues in favour of the Complainant against Respondent No. 2, hence, this Court does not find any perversity in the Impugned Order dated 24.09.2011 vide which the Respondent No. 2 has been acquitted”, the Court said.

Accordingly, the Appeal was dismissed.

Cause Title: Noida Dhatu Pvt. Ltd. V. Udai Continentals & Anr. (Neutral Citation: 2025:DHC:5092)

Appearance:

Appellant: Advocate Vishwendra Verma & Shivali

Respondent: Advocate Roshan Lal Saini for Respondent No.2

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