Spotlight on business families amid Supreme Court’s ruling on HUFs

LiveMint | 13 Aug 2020

The Supreme Court verdict on women’s right in a Hindu undivided family (HUF) is likely to lead to restructuring of holding structures and succession plans, and could result in litigation involving some business families, according to experts.

Many old businesses, which typically held their shares in HUFs and have in the past alienated the women in the family through token shares, may now have to brace for litigation, the experts said.

The apex court ruling has cleared the air about the Hindu Succession (Amendment) Act, 2005. Four aspects of the Act were unclear until Tuesday’s ruling. These include whether the women have the rights given in the amendment since 17 June 1956, when the Act was first passed, whether or not a woman became a coparcener (someone who has the right to assets) if the father was not alive when the 2005 amendment was notified, whether the rights under the 2005 amendment were available to daughters born before on or after the amendment, and whether redistribution of shares could be done in those matters where preliminary decree of partition is passed.

The Supreme Court ruled that daughters have equal rights in a HUF just like sons since the day they are born. “The Supreme Court in one stroke has put to rest all these conflicts by holding the rights of women equal to that of sons as coparcener in a HUF. The only exception is where HUF assets have been partitioned on or before the cut-off date of 20 December 2004. The judgement puts a very strict onus of proof if there was any partition before the cut-off date and sham partitions will not be recognized as degree of proof is high. The judgement upholds gender equality,” said Rajesh Gupta, managing partner, SNG and Partners.

The verdict will have far reaching consequences and more contentious issues are likely to arise in the families where the partition has not happened before the cut-off date, or where the partition has happened contrary to the provisions of the amendment of 2005, Gupta added.

Many business families would dissolve HUFs and replace them with trusts, said Rishabh Shroff, partner, Cyril Amarchand Mangaldas. “A trust allows better control on distribution of assets. The beneficiaries must follow the decision of the trustees and it is difficult to challenge their acts in court. HUF is not preferred as its position keeps changing in law, which makes many families uncomfortable.”

Many families had kept HUFs for ancestral property and transferred their personal assets into trusts. However, they may now dissolve the HUFs altogether to avoid disputes in future. The ruling can lead to a rise in litigation. When the law was modified in 2005, many families had asked daughters to give up their rights in HUFs. In return, daughters received cash or assets. “Many received unfair settlements. What they got was not commensurate to the full extent of their rights. We expect many to approach courts in a few weeks and question the valuations adopted to settle their shares in the HUFs,” Shroff added.