Charitable trusts: Validity of property transfers

By Vikram Wadehra and Vidushi Chokhani, Vidhii Partners
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A trust is an arrangement by which the property of the author of the trust or settlor is transferred to another, the trustee, for the benefit of a third person, the beneficiary. In general terms, trusts fall into one of two categories, private trusts and public trusts. The India Trusts Act, 1882 (act) governs private trusts. Public trusts are further classified into charitable and religious trusts, and the Charitable and Religious Trusts Act, 1920, (CRTA) the Religious Endowments Act, 1863, the Charitable Endowments Act, 1890, the Societies Registration Act, 1860 and the Bombay Public Trust Act, 1950 are the statutes most commonly relied upon to determine the recognition and enforceability of public trusts. Charities are mentioned in schedule seven of the constitution and therefore both the central and state governments have jurisdiction. Statutes of the state in which the charity is registered therefore also apply.

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Vikram Wadehra
Partner
Vidhii Partners

This article comments upon the regime governing the transfer of property by religious and charitable public trusts. Public trusts set up and declared by means of a non-testamentary instrument, apart from any state-specific legislation are required to be registered under the Registration Act, 1908. While India has not ratified the Hague Trust Convention 1985, trust laws give due recognition to the principles in it regarding the characteristics, existence and validity of trusts. The act gives the author or settlor and the trustee wide powers to respectively establish and manage the affairs of the trust, particularly with regard to its property. This is provided that the trust is established for a lawful purpose and does not contravene the provisions of any other law.

Section 7 of the CRTA and section 34 of the act set out the powers of the trustee to apply to the court within whose jurisdiction any substantial part of the subject matter of the trust is situated for its opinion, advice or direction on any question affecting the management or administration of trust property. In Mohan Lall Seal and ors v Kanak Lall Seal and anr, Calcutta High Court stated that although the act directly applied to private trusts only, it laid down principles that were as much applicable to public as to private trusts.

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Vidushi Chokhani
Associate
Vidhii Partners

The court also held that trustees of charitable and religious trusts have an obligation to act in the interest of the trust and its beneficiaries. Public interest demands that any transfer or alienation of trust property should be completely transparent, fair and based on public participation. Leave of the court is vital prior to transfer of property held by the trust as there is always the possibility of dissent from some trustees.

The judgment places reliance upon the case of Venugopala Naidu & ors v Venkatarayulu Naidu Charities & ors in which the Supreme Court held that trustees and courts should consider the market value of any property to be sold. The Supreme Court reaffirmed its own decision in Chenchu Ram Reddy & anor v Government of Andhra Pradesh & ors in which it held that the property of religious and charitable endowments or institutions must be jealously protected because large segments of the community have beneficial interests in them. Sale by private negotiations not visible to the public eye should not therefore be permitted unless there are special reasons to justify them.

In Committee of Management of Pachaiyappa’s Trust v Official Trustee of Madras & anor, the Supreme Court was of the opinion that even a lease of a trust property on the order of a high court judge should be by public auction only. The court cited with approval the Chenchu Ram Reddy case and went on to say that whether the terms of a disposal of charitable or religious property are just and reasonable, and in the interest of the trust can only be determined by making a comparative assessment of competing offers.

Public auction is the means by which persons are able to make their offers. Trustees and courts are duty bound to get maximum advantage of a transaction for the trust. Public auction after adequate publicity ensures participation of those who are interested and anxious to compete, and normally secures the best price.

Public trusts are represented by trustees who manage their affairs for the benefit of the beneficiaries. Any property acquired for the purpose of the trust is registered in the name of the trustee holding it in trust for the benefit of the beneficiaries which in turn casts an obligation on the trustee to act in a transparent manner in the best interests of the beneficiaries and the public interest.

Vikram Wadehra is a partner and head of the Kolkata office of Vidhii Partners. Vidushi Chokhani is an associate.

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