When the partnership goes silent overnight
You started the business together. You signed a partnership deed in front of the same lawyer. You opened the current account at the same bank, both signatures required. For three years, things ran. Then, slowly, your partner stopped sharing daily reports. The accounts grew vague. One Tuesday, a supplier called to say his cheque had bounced. By Friday, you found that lakhs had moved out of the firm account into accounts you had never seen before. By Sunday, your partner's phone was switched off.
Now you do not know where to start. You feel betrayed. You also feel responsible because customers, employees and vendors are calling you, not him. Friends are throwing terms at you — "file 420", "file 406", "go to court for dissolution", "freeze his property". Each of these is a real legal step, but only some of them fit your facts.
This guide walks you through the two clean tracks Indian law gives you — the criminal track, which punishes wrongdoing, and the civil track, which actually settles the books and gets you your money back.
What does the law expect from a partner?
Once two or more people sign a partnership deed, the Partnership Act, 1932 imposes strong duties on each of them, even if the deed is silent.
- Good faith (Section 9). Partners must be "just and faithful to each other" and must render "true accounts and full information".
- Mutual rights and duties (Section 13). Each partner must attend diligently, share profits and losses as agreed, and indemnify the firm for losses caused by his wilful neglect or fraud.
- Account for personal profits (Section 16). Any profit a partner derives from a firm transaction, firm property, or firm name belongs to the firm. He cannot run a secret competing business.
- Authority limited to the business (Section 19). A partner's implied authority binds the firm only for acts in the ordinary course of business. Personal investments funded with firm money fall outside.
When the partner's act is criminal breach of trust
The most natural criminal label for a partner who has taken firm money for himself is "criminal breach of trust" under Section 405 of the Indian Penal Code, 1860, punishable by Section 406 with up to three years' imprisonment, fine, or both.
The two essentials that a complainant must show are clear.
- Entrustment. Property or dominion over property must have been entrusted to the accused. In a partnership, this can be specific entrustment — money handed to him to pay a particular supplier, a vehicle put in his custody, a stock of inventory placed in his godown.
- Dishonest misappropriation or conversion. The accused, instead of using the entrusted property as agreed, has used it for himself or in violation of any direction or contract.
The Supreme Court has put it this way — the offence has two parts, first the creation of an obligation in relation to the property over which dominion is acquired, and second, the misappropriation or dealing with it dishonestly and contrary to the terms of that obligation. Onkar Nath Mishra v State (NCT of Delhi), 2008 spells this out plainly. Sadhupati Nageswara Rao v State of Andhra Pradesh, 2012 repeats that what must be proved together is entrustment and dishonest intention.
If you can show "this money was given to him for X, and he used it for Y", you are most of the way to a Section 406 case. The clearer the entrustment, the cleaner the prosecution.
Section 408 IPC punishes the same offence more strictly when committed by a clerk or servant who has been entrusted by his master. Section 409 IPC raises punishment to ten years' imprisonment when the entrusted person is a public servant, banker, merchant, or agent. In a typical partnership case, Section 406 is the normal fit; 408 and 409 enter the picture only when the wrongdoer is also acting in one of those special capacities.
When it is also cheating under IPC 420
If the partnership itself was a trick — your "partner" never intended to invest or share, and induced you to put money in only to drain it — Section 420 IPC also fits. The difference is simple. Cheating exists when the dishonest plan is there at the time of inducement. Criminal breach of trust exists when the property is honestly entrusted but later dishonestly misappropriated. Many real cases involve both, and Section 420 and 406 commonly run together in the FIR.
For cheating, the Supreme Court has been firm. Mere business failure is not cheating. Inder Mohan Goswami v State of Uttaranchal, 2007 said that fraudulent or dishonest intention must be shown at the time of making the promise. So a partner who is simply a bad businessman does not attract 420 — but fake invoices, ghost vendors, or hidden parallel accounts almost always do.
The tricky line — when "his use" of firm money is not a crime
Indian courts have drawn one important line that surprises many complainants. A partner has an undefined ownership share over firm property along with the other partners. The leading view in Velji Raghavji, 1964 is that an owner of property cannot ordinarily commit misappropriation of his own property; a partner who uses any partnership asset for personal purposes may be civilly accountable to the firm, but he does not, by that fact alone, commit a crime.
So the criminal case becomes strong only when you can show specific entrustment putting dominion in his hands as a trustee, not merely as a co-owner. Examples that work — money you transferred to him to pay GST, customer cheques he was supposed to deposit in the firm account, inventory placed in his exclusive custody. Examples that do not work — vague allegations that he "took out money" or "used the firm car too much". Surgical drafting decides the result.
The civil track: dissolution and accounts
The civil side is often where the actual money comes back. The Partnership Act gives you a complete framework.
Dissolution of the firm. Where one partner's conduct makes it impossible to continue — refusal to render accounts, keeping erroneous accounts, using firm funds for personal debts — courts treat that as enough ground for dissolution.
Settlement of accounts (Section 48). Losses are paid first out of profits, next out of capital, and last out of partners individually in their profit-share ratio. Capital is then returned, and any surplus is divided in profit-share ratio.
Interim relief. A receiver can be appointed to take control of firm property. Injunctions can stop the dishonest partner from operating the firm bank account or transferring firm property. Attachment before judgment can lock his personal property.
Decree for accounts. The court draws up a true account, the dishonest partner is directed to pay the difference, and property he bought with firm money can, in a strong case, be treated as held on trust for the firm.
Section 69 of the Partnership Act — does registration block your suit?
Many small business partners worry about this. Section 69 says an unregistered firm cannot sue a third party on contract, and a partner of an unregistered firm cannot sue the firm or co-partners on contract. The crucial exception is Section 69(3) — the bar does not apply to a suit for dissolution, accounts of a dissolved firm, or realising the property of a dissolved firm. So even if your firm was never registered, the dissolution-and-accounts suit you actually need is open. Do not let Section 69 scare you out of court — but get the firm registered going forward.
Filing the FIR under the BNSS
Criminal breach of trust under IPC 406 and cheating under IPC 420 are both cognizable. The BNSS, 2023, which has replaced the CrPC, retains the same mechanism — walk into the police station with jurisdiction over where the firm operates, give a written complaint, and demand FIR registration.
If the SHO refuses, escalate by written complaint to the SP, then to the Judicial Magistrate of First Class, and finally to the High Court invoking inherent powers. See our piece on FIR refusal and police inaction for the practical steps.
Running civil and criminal cases at the same time
The Supreme Court has many times made clear that a single set of facts can give rise to both a civil wrong and a criminal offence. The pendency of one does not bar the other. In partner-fraud situations, this is the smartest combined strategy.
The criminal case puts real pressure on the runaway partner — bail, summons, banking watch. The civil suit, in parallel, ensures that recovery does not depend on a guilty verdict; the civil court orders accounts, attaches assets, and passes a money decree.
One caution. If your real grievance is only "he owes me money" with no real dishonesty in the transaction, treating it as a criminal case can backfire. The Supreme Court has cautioned against using criminal law as a shortcut for civil claims, and has quashed such FIRs.
What should I actually do now?
- Secure the books and the bank. Pull certified bank statements, GST returns, and the latest balance sheet. Tell the bank in writing that misappropriation is suspected; ask the bank manager to flag the account so further unilateral withdrawals are paused if possible.
- Lock down digital evidence. Save WhatsApp chats, email threads, accounting software exports, and CCTV footage of office cash handlings. Take screenshots and back them up to email.
- Send a written notice to the partner. A registered AD legal notice asking for accounts and return of firm money creates a record. Silence or evasive replies become evidence.
- Decide the route honestly. Sit with a lawyer for one paid consultation. Identify which transactions show specific entrustment (criminal track) and which only show co-owner misuse (civil track only).
- File the criminal complaint where facts fit. Use IPC 406 for criminal breach of trust. Add IPC 420 if there is fraud at inception. Add IPC 408 if he was operationally a managerial / employee role. Attach bank entries and documentary proof of entrustment.
- If police don't act, escalate. Written complaint to the SP, then a magistrate complaint, then the High Court. Do not let the FIR stage drag for months.
- File a civil suit for dissolution and accounts. Even if the firm is unregistered, Section 69(3) keeps this door open. Ask for an interim injunction freezing his operation of firm bank accounts and a receiver where necessary.
- Seek attachment before judgment. If you can identify property he has bought in his own name with firm money, ask the court to attach it so that recovery is real, not paper.
- Inform vendors and customers carefully. A short, factual written communication to key vendors / customers protects your reputation. Avoid emotional or defamatory content.
- Get realistic about timelines. A clean civil suit for dissolution and accounts typically takes 18 to 30 months; a parallel cheating and breach-of-trust case can take longer but creates strong settlement leverage in the first year itself.
Saving what you built, with a clear head
Partnership disputes feel personal because they are personal. The man who walked away with the money used to share your tea. That hurt is real and stays for a while. The law cannot heal that, but it can give you a structured way out — separate the criminal label from the civil recovery, send the right notices, file the right suits, and stop hoping that he will return on his own.
Pinaka Legal handles partner-fraud and partnership-dissolution matters as a regular part of its commercial practice. The first paid consultation is usually spent doing exactly what this article asks you to do — separating the entrustment-based criminal piece from the co-owner civil piece, identifying which assets can still be saved, and choosing the right combination of civil and criminal steps.
The business you built is worth saving on paper, even if the partnership is over in spirit. With the right legal posture, much of the money can come back, and the man who walked away learns that walking away is not a defence.
Frequently Asked Questions
My partner took the firm's money and vanished. Can I file an FIR?
Yes, if there is clear entrustment of money to him and he has dishonestly misappropriated it. Criminal breach of trust under IPC 406 fits these facts. If he had a dishonest plan from the beginning, IPC 420 cheating may also apply. The police may register an FIR; if they hesitate, your written complaint must spell out entrustment and dishonest use, citing specific transactions and dates.
Is a business partner taking firm money automatically a criminal case?
Not always. The Supreme Court has said that an owner of property cannot ordinarily commit misappropriation of his own property, and a partner has undefined ownership in firm assets. So mere use of firm money by a partner may give rise only to a civil duty to account, not a crime. The criminal angle applies clearly when there is specific entrustment, fraudulent withdrawal, false accounts, or fake vendors.
What is the difference between IPC 406, 408 and 409 in a partner case?
IPC 406 punishes ordinary criminal breach of trust by anyone entrusted with property. IPC 408 punishes the same offence committed by a clerk or servant entrusted by the master. IPC 409 punishes it when committed by a public servant, banker, merchant or agent. A pure partner case usually falls under 406 or, where there is also cheating, under 420. A managing partner with employee-like functions may attract 408.
Can I sue my business partner if our firm is not registered?
Section 69 of the Partnership Act does bar an unregistered firm from suing third parties on contract claims, but Section 69(3) saves a suit for dissolution or accounts of a dissolved firm. So you can ask the court to dissolve the partnership and settle accounts even today. Get the firm registered before filing fresh suits against outsiders so future commercial disputes are not blocked by Section 69.
What is a suit for accounts and dissolution?
It is a civil suit where the court takes the partnership accounts, finds out what each partner has put in, taken out, and is owed, and orders the firm to be wound up. Section 48 of the Partnership Act lays down how losses and capital are settled. The court can also pass an interim order to freeze firm assets so that the dishonest partner cannot drain them further.
Can I run civil and criminal cases together?
Yes. The Supreme Court has repeatedly held that the same facts may give rise to both a civil and a criminal proceeding, and one does not bar the other. Most well-advised victims file the civil suit for accounts and dissolution, and a parallel criminal complaint where there is genuine breach of trust or cheating. The two together usually push the wrongdoer to settle within months.
What duties does a partner owe to other partners?
Section 9 of the Partnership Act says partners must be just and faithful, carry on the business for the greatest common advantage, and render true accounts and full information. Section 13 deals with mutual rights and duties. Section 16 says any secret profit a partner makes from the firm must be paid to the firm. Section 19 governs his authority to bind the firm in ordinary business.
He drained the firm's bank account. What do I do first?
First, secure proof. Get certified bank statements showing the withdrawals. Send a written notice to the bank stating misappropriation so that suspicious activity is on record. Then file a written police complaint under IPC 406 and IPC 420. In parallel, file a civil suit for dissolution and accounts and seek an injunction freezing whatever is left in firm accounts and his personal property.
Will the police register an FIR if I say it is partner ka jhagda?
Sometimes the police treat it as a civil matter. Your complaint should not say it is only a partnership dispute. It should say money was specifically entrusted to him for paying suppliers, salaries or vendors, and he has used it for himself with dishonest intention. That language matches IPC 406 and helps the SHO see the cognizable offence and act on it.
What if he is hiding outside Delhi or outside India?
FIR registration does not need his physical presence. Once the FIR is registered, the police can issue summons, take search and seizure steps, and apply for a non-bailable warrant. For accused outside India, a Look Out Circular and red corner notice may follow. Civilly, the suit can proceed in his absence after due service, and a decree can be passed ex parte and then executed against his Indian assets.
For more articles on Indian law, visit the Pinaka Legal Blog. For specific advice on your situation, call +91 8595704798 or write to info@pinakalegal.com.