One Partner Took Firm Money: Civil and Criminal Options

Money Missing from the Firm Account

You opened the bank app on a Tuesday morning and the firm's current account was lighter than it should have been. Big debits to your partner's personal UPI handle. A car EMI paid from the firm. A hotel booking in a different city. You ask quietly, you get a vague answer. You ask again, you get an angry one. The vendor calls you — his cheque has bounced. The accountant pulls up the books and your partner's "personal drawings" have quietly tripled over the last six months. The firm is haemorrhaging and one human being inside the firm is the cause.

What can you actually do? Most people in this situation jump straight to "let's file a criminal case". Some panic and freeze the account, breaking everything. The right answer is calmer and more layered. Indian law gives you a civil route under the Indian Partnership Act 1932 that is almost always available, and a criminal route under the Indian Penal Code 1860 (now mirrored in the Bharatiya Nyaya Sanhita 2023) that is available in some cases but not all. This blog walks through both, in plain language, and tells you when to use which.

The Civil Route Under the Partnership Act

The Indian Partnership Act 1932 sets out the duties partners owe to each other and to the firm. Five sections matter most when one partner has been helping themselves to firm property.

Section 9 — Duty of utmost good faith. Partners are bound to be just and faithful to each other. The relationship is described as uberrimae fidei — the highest standard of trust, the same standard that applies to a contract of insurance. The book commentary on the Partnership Act puts it bluntly: mutual confidence is the lifeblood of the firm. A partner who quietly moves firm money for personal use breaches this duty.

Section 10 — Indemnity for fraud. Every partner must indemnify the firm for any loss caused by his fraud in the conduct of the firm's business. The defaulting partner cannot escape this even by agreement of the other partners.

Section 13 — Mutual rights and liabilities. Subject to contract between the partners, every partner has a duty to attend diligently to the business, profits are shared equally, drawings beyond agreed limits are accountable, and a partner is liable for wilful neglect. Section 13(b) makes clear that a partner is not entitled to remuneration unless agreed; helping yourself to firm money as a kind of unannounced salary is no defence.

Section 14 — Property of the firm. Anything originally brought into the stock and anything subsequently acquired for the firm is firm property. Diverting it to personal use is actionable.

Section 19 — Implied authority. Every partner is the agent of the firm for usual business of the kind carried on. A partner has authority to do what is normally done in this trade. Crucially, Section 19(2) lists what a partner does not have implied authority to do — submit to arbitration, open a bank account in his own name on behalf of the firm, compromise a claim, withdraw a suit, admit liability, acquire immovable property, transfer immovable property, or enter into a partnership on behalf of the firm. Acts outside implied authority do not bind the firm and become the personal liability of the partner.

Good Faith and Fraud Indemnity

The good faith principle in Section 9 is not decorative. The book commentary cites Helmore v Smith (1886) for the rule that mutual confidence is the foundation of partnership, and Const v Harris (1824) for the rule that the duty is reciprocal. A partner who has himself acted in bad faith cannot complain about another partner's lapses.

The duty also continues even after a partner ceases to be a partner. Pathirana v Pathirana (1967), cited in the leading commentary, held that a partner who renewed a key supply agreement in his own name during a notice period had to account for the profits to his former co-partner. The principle reaches into the past and the recent future of the relationship.

If a partner has obtained a private advantage at the firm's expense — secret commission, diversion of an opportunity, renewal of a firm lease in his personal name — he is bound to bring that benefit back into the firm's pool.

Suit for Accounts and Dissolution

The classical civil remedy when a partner has been pilfering is a suit for dissolution of the firm together with a suit for accounts. Section 48 of the Partnership Act lays out the order in which the partnership accounts are settled on dissolution: first paying outside debts, then paying back what each partner has advanced as a loan to the firm, then returning capital, then distributing the residue as profit.

Inside this framework, the defaulting partner's drawings, diversions, and unaccounted withdrawals are debited to his share. If his share is insufficient, he becomes personally liable to the firm and to the other partners for the shortfall. A court-appointed receiver can be sought during the suit to freeze the books and the bank account, so that more money does not vanish during the litigation. A court-appointed auditor can also be sought to take accounts.

If the firm is registered, the suit is straightforward. If the firm is unregistered, Section 69 of the Partnership Act bars certain suits, but suits for dissolution and accounts of a dissolved firm are expressly allowed even without registration. So even an unregistered firm has access to this remedy.

You can also seek a temporary injunction restraining the defaulting partner from operating the firm bank account, signing cheques, dealing with firm property, or representing the firm to third parties. The reliefs and the framing must be specific. A vague prayer to "stop him from acting as a partner" will be refused.

The Criminal Route: IPC 405, 406, 408, 409

Indian criminal law has a specific offence for someone who has been entrusted with property and dishonestly misappropriates it. This is criminal breach of trust.

Section 405 IPC (defines the offence). A person who is "in any manner entrusted with property, or with any dominion over property" and dishonestly misappropriates or converts it to his own use, or dishonestly uses or disposes of it in violation of any direction of law or any contract — express or implied — about how the trust was to be discharged, commits criminal breach of trust. The two essentials are entrustment and dishonest misappropriation.

Section 406 IPC (the punishment). Punishment is imprisonment up to three years, or fine, or both.

Section 408 IPC. Where the accused was a clerk or servant entrusted with property in that capacity, the punishment goes up to seven years.

Section 409 IPC. Where the accused was a public servant, banker, merchant, factor, broker, attorney, or agent entrusted with property in that capacity, the punishment goes up to ten years or even life. This is the heaviest version of criminal breach of trust.

The corresponding sections in the Bharatiya Nyaya Sanhita 2023 are Sections 316(1), 316(2), 316(4) and 316(5) respectively, with broadly the same elements.

The Supreme Court in Sadhupati Nageswara Rao v State of Andhra Pradesh, 2012 held that to bring home Section 405, the prosecution must conjointly prove (i) entrustment of property and (ii) that the accused, with dishonest intent, misappropriated or converted it to his own use to the detriment of the person who entrusted it. Onkar Nath Mishra v State (NCT of Delhi), 2008 set out two stages — the creation of an obligation in respect of property over which dominion is acquired, and the dishonest dealing with that property contrary to the obligation.

The Partner Trap: Velji Raghavji

Now the warning. Indian courts have repeatedly held that a partner cannot be prosecuted for criminal breach of trust merely because he used firm money for personal purposes. The reason is straightforward: every partner has an undefined ownership in every asset of the firm. He is part-owner, not a stranger holding someone else's money in trust.

The leading authority cited in standard penal commentary is Velji Raghavji Patel v State of Maharashtra, AIR 1965 SC. The Supreme Court held: a partner has dominion over partnership property, but mere dominion is not enough. To prosecute a partner under Section 405, the prosecution must establish that dominion over the assets — or over a particular asset — was, by a special agreement between the parties, entrusted to that partner in a fiduciary capacity. Without such a special agreement, a partner who uses firm money may be civilly accountable, but he has not committed criminal breach of trust.

Anil Saran v State of Bihar, AIR 1996 SC qualified this: where a partner is entrusted with property under a special contract and holds it in a fiduciary capacity, any misappropriation of that property does amount to criminal breach of trust. So the criminal route is open — but only where you can show the special arrangement.

What does this mean in real life? If your partnership deed names one partner as the keeper of cash, the custodian of stock, the accounts manager with sole signing authority, or the trustee of customer advances, his diversion of those specific assets is potentially criminal. If, however, both partners have equal authority over a joint account and one is simply pulling more out than agreed, that is a civil dispute over drawings, not a criminal misappropriation. Pleading the criminal complaint without identifying the entrustment is the most common reason these complaints get quashed under Section 482 CrPC / Section 528 BNSS.

Civil and Criminal Together

Where both routes are open, can you run them in parallel? Yes. The Supreme Court has consistently held that civil and criminal proceedings on the same set of facts can co-exist; the existence of a civil dispute is no bar to a criminal investigation, and vice versa. But two cautions apply.

First, the criminal complaint must stand on its own factual feet. If the magistrate or the High Court reads the complaint and concludes that this is at heart a partnership dispute about accounts, the complaint will be quashed. Pinning your case on the entrustment is essential.

Second, courts increasingly disfavour the use of criminal law to coerce a settlement in a civil matter. Indian Oil Corporation v NEPC India Ltd, AIR 2006 SC and many later judgments have warned against this. So file criminally only where the evidence genuinely meets the criminal threshold — entrustment in a fiduciary capacity, plus dishonest intention. If the case is really about drawings and accounts, stay on the civil side.

Where there is also a related breach of contract — vendor agreements, customer contracts, intercompany loans — those claims travel naturally with the civil suit and are usually pleaded in the same plaint as additional reliefs.

What Should I Actually Do Now?

1. Get the books in your hands today. Bank statements for 24 months, day book, ledger, GST returns, salary registers, vendor invoices. If your partner controls the books, the magistrate or civil court can direct production, but begin with whatever you can lawfully access.
2. Identify the entrustment, if any. Pull out the partnership deed, the bank mandate, the staff letters, and any internal email naming who handles which fund. If a particular pot of money was entrusted to your partner, highlight it. This is what decides the criminal route.
3. Send a formal demand and notice. Spell out the unaccounted withdrawals, demand restoration within a fixed period, and reserve the right to dissolve the firm and sue. The reply is evidence either way.
4. File a civil suit for dissolution and accounts. Pray for dissolution, taking of accounts under Section 48, recovery of the unaccounted amount, interest, and costs. Ask for a receiver and an interim injunction restraining the partner from operating the firm account.
5. Approach the bank with a written notice. Once a suit is filed, file the order or even the suit copy with the bank requesting a status quo on operations of the firm account pending court directions.
6. Decide the criminal route honestly. Where there is genuine entrustment in a fiduciary capacity — cash custody, stock custody, customer trust money — file an FIR or a magistrate's complaint under Section 173 / Section 200 BNSS for offences under Sections 316(2), 316(4) or 316(5) BNSS (the BNS equivalents of IPC 406, 408 and 409).
7. Preserve electronic evidence carefully. Take backups of the email account, accounting software, WhatsApp chats, and audit reports. Get a Section 65B / BSA certificate ready for use in court.
8. Speak to a partnership disputes lawyer early. Pinaka Legal regularly helps partners in Delhi map out civil and criminal routes side by side, write a calibrated legal notice, and protect firm property while the dispute is pending.

Frequently Asked Questions

Can a partner be prosecuted for taking the firm's money?

Sometimes yes, but not as a default. The Supreme Court in Velji Raghavji Patel v State of Maharashtra (1965) held that because every partner has an undefined ownership in the firm's assets, mere use of those assets for a personal purpose is not automatically criminal misappropriation. To prosecute a partner under Section 405 / 406 IPC, the complainant must prove a special arrangement under which a particular asset or fund was entrusted to that specific partner in a fiduciary capacity. Without that entrustment, the dispute is civil — a suit for accounts and damages, not a criminal case.

What civil case do I file?

Usually a suit for dissolution of the firm with accounts taken under Section 48 of the Indian Partnership Act 1932. You can pray for recovery of the unaccounted amount, interest, costs, and a permanent injunction. Together with the suit, ask for a temporary injunction restraining your partner from operating the firm's bank account and dealing with firm property, and for the appointment of a receiver to take charge of the books. If the firm is unregistered, this kind of suit is still allowed because Section 69 carves out suits for dissolution and accounts of a dissolved firm.

Is mere overdrawing criminal?

No. If your partner had equal authority over the firm's account and simply drew more than agreed, he has breached the partnership deed and is accountable in the suit for accounts. He has not committed a crime. Criminal breach of trust requires entrustment in a fiduciary capacity plus dishonest misappropriation. Standard partnership "drawings" disputes do not meet that bar.

What if the partner forged my signature on cheques?

That is a different offence. Forgery under Sections 463–471 IPC (Sections 336–341 BNS) and cheating under Section 420 IPC (Section 318 BNS) cover the unauthorised use of your signature. These offences do not require the entrustment threshold of Section 405. Preserve the cheques and the bank's specimen signature card, get a handwriting expert opinion, and file an FIR. The civil suit for accounts can run in parallel.

Should I freeze the firm's bank account immediately?

Not unilaterally. A unilateral freeze can stop salaries, vendor payments, and statutory dues, exposing the firm to its own liabilities. Instead, file a civil suit and apply on day one for a court direction to the bank to operate the account only on joint signatures or under court oversight. The court can also direct the bank to release approved payments while pending the case. This protects firm operations while protecting your interest.

What is the limitation period for these claims?

For a suit for accounts after dissolution, three years from dissolution under Article 5 of the Limitation Act 1963. For recovery of money, three years from when the right to receive arose. For criminal breach of trust under Section 406, the limitation under Section 468 CrPC / Section 514 BNSS depends on the punishment — for sentences up to three years, the limitation is three years from the date of the offence; for Section 408 and 409, longer or no fixed limitation. Move quickly because limitation kills strong cases silently.

What evidence is most useful?

Bank statements showing diversions to personal accounts, the partnership deed and any sub-mandate showing who is the custodian of which fund, email and WhatsApp threads where the partner admitted withdrawals or promised to repay, accounting software access logs, GST and TDS returns, signed vendor invoices, and an independent auditor's report on the unaccounted sums. Wherever electronic records are filed, prepare a Section 65B / Bharatiya Sakshya Adhiniyam certificate from a person in lawful charge of the device.

Can I run civil and criminal cases at the same time?

Yes. Indian courts have repeatedly held that civil and criminal proceedings on the same facts can co-exist. The pendency of one is no bar to the other. But the criminal complaint must independently meet criminal-law standards — particularly the entrustment requirement under Section 405. If the magistrate sees the complaint as merely a civil dispute dressed up in criminal clothes, he will dismiss it, and the High Court will quash if it goes that far.

Will a criminal FIR force my partner to settle?

Sometimes — but using criminal law as a settlement lever is risky. The Supreme Court has cautioned against it repeatedly. If the FIR is groundless, your partner can apply for quashing under Section 482 CrPC / Section 528 BNSS, can sue for malicious prosecution, and can obtain costs. File criminally only where the entrustment and dishonest intention can actually be shown. The civil route, properly run, is usually faster and more reliable for getting your money back.

For more articles on Indian law, visit the Pinaka Legal Blog.

Written by the Pinaka Legal Editorial Team. For queries, call +91 8595704798 or email info@pinakalegal.com.