Only ‘Karta’ of a Hindu Undivided Family can be prosecuted for dishonour of cheques Gujarat HC [Read judgment]

The Gujarat High Court has held that only a Hindu Undivided Family (HUF) is not an ‘association of individuals’ under Section 141 of the Negotiable Instruments Act (NI Act). Hence, only a ‘Karta’ of a Hindu Undivided Family can be prosecuted for the dishonour of a cheque under Section 138 of the NI Act..The judgment was delivered on January 31 by Justice JB Pardiwala in a petition filed by one Rajendrabhai Jayantilal Shah..Advocate Amit R Joshi appeared for Shah while advocate Monal Davawala represented the respondent along with advocate BS Soparkar..Facts.By way of background Shah who was the Karta of an HUF had issued a cheque of Rs. 5 lakh on behalf of HUF. The cheque had bounced due to insufficiency of funds and Shah was sought to be prosecuted..Shah had moved the High Court under Article 226 contesting the same..Arguments.His contention was that since HUF is a legal entity, it will constitute an association of individuals within the meaning of Section 141 of the NI Act. Hence, the Karta of the HUF alone cannot be prosecuted for an offence punishable under Section 138 without impleading the HUF..Shah had argued that Karta of the HUF is not the owner of the firm, and therefore, the HUF, a legal entity i.e. as an association of individuals, has got to be arraigned as an accused so as to make the prosecution of the members of the HUF maintainable for the offence punishable under Section 138 of the NI Act..He submitted that the HUF, being a legal entity, is a juristic person and a separate entity from the coparcener. The ‘Karta’ of the HUF exists because of the HUF otherwise, the ‘Karta’ has no legal existence..The respondent, on the other hand, submitted that an HUF is not a firm nor an association of persons and will not constitute an “association of individuals”, according to the term “company”, as explained in Section 141 of the NI Act..Placing reliance on the judgment of the Supreme court in the case of Ramanlal Bhailal Patel vs. State of Gujarat [(2008)5 SCC 449], he contended that the term “association of individuals” means a group of persons, who have become co-owners by their own volition with a common purpose. Hence, though the HUF, in the present case, appears to be engaged in the business in the name of ‘M.S. Traders’, and the members may be having a common purpose, i.e. to carry on business, but in an HUF, the members do not become co-owners by their own free will and volition, but by birth..The crux of his submission was that an HUF has no legal entity distinct and separate from that of the members who constitute it. It may be that a member of a Hindu Undivided Family may continue to have certain personal rights and may be able to own property in his own right and enter into a contract in his own right but a Hindu Undivided Family is not like a company, partnership firm, Corporation or a limited concern and it cannot, therefore, be said that it has a legal entity distinct and separate from that of those who constitute it..Judgment.The court reiterated the exposition in the Supreme Court judgment in Standard Chartered Bank vs. Directorate of Enforcement that an HUF is a legal entity capable of owning property and, therefore, undoubtedly, such a HUF is a person as defined in Section 3(42) of the General Clauses Act and Section 11 of IPC. However since HUF is an artificial person the, sentence of imprisonment cannot be imposed on the HUF..The Court held that to fasten vicarious liability on an individual who is a component of an artificial or juridical person, the statute has to specifically provide for it..“For an offence committed by an artificial / juridical person, unless it is specific provided in the statute, every individual who is a component of the artificial or juridical person cannot be held vicariously liable for punishment; it is only the artificial or juridical person who is liable for punishment. A company incorporated under the Companies Act is a person. To create such vicarious liability for the persons in charge of the day to day affairs of the company along with the company, the Legislature has enacted Section 141 of the Act referred to above. In the case at hand, the argument canvassed on behalf of the applicant being the ‘Karta’ of the H.U.F. is that an H.U.F. is a legal entity and should be read in Section 141 of the N.I. Act. In other words, according to the applicant, an H.U.F. is a company as defined in Section 141 of the Act. If it is argued that if that be so, then the H.U.F. is a “association of individuals” as expressed in the explanation (a) to Section 141 of the N.I. Act.”.The Court turned down the contention of the petitioner that HUF is an association of individuals under Section 141 since the element of free will and volition is missing for membership and membership in HUF is by birth. Relying on the Supreme court decision in Ramanlal Bhailal Patel vs. State of Gujarat, the Court held that.“Thus, I have reached to the conclusion that although the H.U.F. in the case at hand may be engaged in a business and is running a firm in the name of M.S. Traders and may be having a common purpose, yet what is missing is the element of free will and volition. A mere combination of individuals will not constitute an “association of individuals” . To make it as an “association of individuals”, in terms of Section 141 of the N.I. Act, it is absolutely necessary that the combination of individuals must be on their own free will and volition. Secondly, it is also necessary that such combination of individuals must be with a common purpose. There may be a common purpose to be carried forward by an H.U.F., but an individual becomes a member of the H.U.F., not on his own free will and volition, but by status and birth.”.Interestingly, the judgment of the court also has references to the position taken by other High Courts in the country..Regarding the decision of the Bombay High Court in the case of Dadasaheb Rawal Cooperative Bank of Dondaicha v. RJ Jain, in which it was held that Section 141 would encompass all types of business organisations, the Court held that,.“It is difficult for me to subscribe to the view taken by the learned Single Judge of the Bombay High Court, more particularly, in view of decision of the Supreme Court in the case of Ramanlal Bhailal Patel.”.Regarding the Madras High Court decision in Arpit Jhanwar v. Kamlesh Jain, the Court concurred and said,.“The view taken by the Madras High Court in the case of Arpit Jhanwar is quite commendable and I am in agreement with the reasonings assigned in the said judgment.”.Conclusion.The Court therefore, rejected the petition and also set out the following conclusions:.“[a] A H.U.F. will not constitute an “association of individuals” within the meaning of Section of 141 of the N.I. Act..[b] A H.U.F. is not a legal entity distinct and separate from that of the members who constitute it..[c] The principles laid down by the Supreme Court in the case of Aneeta Hada (supra) will not apply in the case of a H.U.F.”.It, therefore, dismissed the petition.