CS Executive Economic and Commercial Law Notes
- 1 CS Executive Economic and Commercial Law Notes
- 1.1 INDIAN TRUST ACT 1882
- 1.2 Trust and Contract
- 1.3 CLASSIFICATION OF TRUSTS
- 1.4 CREATION OF TRUSTS
- 1.5 Who can create a Trust
- 1.6 Who may be a Trustee
INDIAN TRUST ACT 1882
A ‘trust’ is an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner.
Definition of Trust [Section 3]
- an obligation annexed to the ownership of property and
- arising out of confidence reposed in and
- accepted by the owner or declared and accepted by him,
- for the benefit of another or of another and the owner.
The following are the essential elements of a trust:-
- The author or the settler of the trust;
- The trustee;
- The beneficiary;
- The trust property or the subject-matter of trust
- The object of the trust;
- The instrument of trust.
Author of the Trusts – The person who reposes or declares the confidence
Trustee – The person who accepts the confidence.
Beneficiary – The person for whose benefit the confidence is accepted.
Trust property or trusts money or beneficial interest – The subject matter of the trust.
Instrument of Trust – Instrument declaring the trust.
Trust and Contract
A contract creates a trust where it has brought into existence an obligation annexed to the ownership of property for the benefit of a person other than the owner. There is always a fiduciary relationship between trustee and beneficiary, but not between the parties to a contract.
Difference between Trust and Bailment
The definition of Bailment is given in Section 148 of the Indian Contract Act, 1872. The following is the difference between a trust and a bailment.
- A trustee becomes the full owner of trust property. A bailee acquires special property only.
- The obligation of the bailee is legal, whereas that of a trustee is equitable.
- A bailment may be created for movable property only. A trust may be created for both movable and immovable properties.
Difference between Trust and Agency
- An agent has no title to the property. A trustee is the full owner of the trust property.
- An agent acts on behalf of his principal and is subject to his control. A trustee acts in his own right.
- An agent is generally not personally liable, a trustee is.
CLASSIFICATION OF TRUSTS
Trusts are divisible into several classes according to the mode of their creation. Some of the important classes are as follows:
Simple and Special Trusts
Where the trustee is merely to hold the estate without having any active duties to perform it is called a simple trust. Where, however, the trust has been created for a particular object or purpose there is a special trust.
Thus, in a simple trust, the trustee is merely to hold the property for the benefit of the beneficiary and in a special trust, the trustee has duties to perform.
Oral and Written Trusts
A trust in relation of movable property can be declared orally by transferring the possession of the property with a direction that the property be held in trust. In regard to a private trust for immovable properties, a written trust deed is required.
Charitable or Religious Trust
Charitable or Religious Trust means a trust for the benefit of
- public at large or
- at least a section of the public
Two factors shall be considered in order to determine whether a deed of trust is public or charitable trust:
- What is the dominant intention of the testator
- Whether the class indicated as the object of charity forms at least a section of the public.
- Where the main and paramount intention of the settler was to benefit the members of his family and thereafter the members of his caste who might need assistance from such funds there could be no public or charitable trust created.
Doctrine of Cy pres
Cy Pres means near to it. The doctrine of Cy pres applies only to general charitable trusts. The reason is that a public charity is perpetual and the rule against perpetuity does not apply to it. It can never die though its nature may be changed.
Thus where a clear charitable intention is expressed, it will not be permitted to fail because the mode, if specified, cannot be executed. The law will substitute another mode as near as possible to the mode specified by the ‘donor’.
Express and Implied Trusts
Express trusts are created by the act of parties either in words or in writing. While an implied trust is one which is deduced from the conduct of the parties and the circumstances of the transactions.
Public and Private Trusts
The criterion for deciding whether a particular trust is or is not of a private nature, is whether the said trust is or is not for the benefit of individuals. Where the intention of the founder is that the property is to be dedicated for the benefit of idols, the trust is undoubtedly of a public nature and not for the benefit of the individual members of family.
In case of a private the beneficiaries are definite and ascertained individuals or individuals who within definite time can be definitely ascertained but in case of public trust the beneficial interest must be vested in an uncertain and fluctuating body of persons either the public at large or some considerable portion of it answering a particular description.
Revocable and Irrevocable Trusts
A revocable trust is one which is revocable when it is created by a non-testamentary instrument or orally and a power of revocation has been expressly reserved by the settler. A trust may be revoked by the consent of all the beneficiaries who are competent to contract.
All other trusts are irrevocable. Besides if a trust is created for charitable or religious purposes, such a trust cannot be revoked.
A Public-cum-Private Trust is one in which a religious trust is created for the immovable property like a Temple, Durgah etc. in the nature of a public trust but there is a direction for use of income through offerings or otherwise for public purposes and also a part thereof to person(s) in charge of the Temple, Durgah etc. A public-cum-private trust may become a fully public trust when the private beneficiary(ies) renounces his/their rights to which they are entitled.
A constructive trust is one which is not created by the express or implied act of the settler, but which is deemed by operation of law or arises by construction of law. A constructive trust is a relationship with respect to a property subjecting the person by whom the title to the property is held by an equitable duty to convey it to another on the ground that his acquisition or retention of the property would be wrongful and that he would be unjustly enriched if he were permitted to retain the property.
A resulting trust is one, which is implied in favour of the settler or his representative. It comes into existence where the property is incompletely conveyed or where on a conveyance, the beneficial interest in the property is not completely disposed of and the property or the undisposed beneficial interest in it reverts back to the settler.
Executed and Executory Trust
An executed trust is one in which the limitation of the estate and the beneficiaries are prescribed by the settler in the trust deed itself and no further instrument is required.
An executory trust is not complete in itself and its execution is left to the judgement of the trustees. Here, the settler instead of expressing exactly what he means, tells the trustees to do their best to carry out his intentions.
CREATION OF TRUSTS
- Creation of Trusts for lawful purposes only
The Act allows creation of a trust for any lawful purposes. A trust is lawful unless it is
- forbidden by law, or
- is of such a nature which will defeat the provisions of any law, or
- is fraudulent, or
- involves or implies injury to the person or property of another, or
- the Court regards it as immoral or opposed to public policy.
Thus a trust which does not fall in any of the above prohibitions, is deemed to be for lawful purpose. A trust for an unlawful purpose is void.
- Trust of immovable property
A trust of immovable property can be created by an instrument in writing and registered, signed by the author of the trust or by Will.Trust of movable property requires no writing or registration. The mere transfer of possession coupled with the intention of the parties that such delivery of possession should vest the property in the trustee is sufficient to create a trust.
- Conditions for Creation of a trust
A trust is created when the author of the trust indicates with reasonable certainty by any words or acts:
- an intention on his part to create thereby a trust;
- the purpose of the trust;
- the beneficiary, and
- the trust property;
Author shall transfer the trust property to the trustee except where a trust is declared by Will or the author of the trust is himself to be the trustee.
Certainties of a Trust
For creating a trust the author of the trust should indicate with reasonable certainty the following:
- Certainty in words: The words used to create a trust must be clear and certain so as to explain a clear intention to create a trust. Recommendatory words like “I hope” “I wish” are not sufficient.
- Certainty in the object of the trust: The beneficiary, for whose benefit the trust is created, must be shown clearly.
- Certainty in the subject-matter of the trust: The subject matter of the trust must be clear, i.e., the property, in respect of which a trust is created, must be shown clearly. Purpose of the trust should be certain.
- If the trust instrument is lacking in first and third certainties, no trust is created but if the second certainty is absent, resulting trust will be created in favour of the author of the trust.
- A bequeaths certain property to B, “having the fullest confidence that he will dispose of it for the benefit of C”. This creates a trust so far as regards A and C. B is not bound as a trustee.
- A bequeaths certain property to B, “hoping he will continue it in the family”. This does not create a trust as the beneficiary is not indicated with reasonable certainty.
- A bequeaths certain property to B, requesting him to distribute it amongst such members of C’s family as B should think most deserving. This does not create a trust, for the beneficiaries are not indicated with reasonable certainty.
- A bequeaths certain property to B desiring him to divide the bulk of it among C’s children. This does not create a trust, for the trust property is not indicated with sufficient certainty.
- A bequeaths a shop and stock-in-trade to B on condition that he pays A’s debts and a legacy to C. This is condition, not a trust for A’s creditors and C.
Who can create a Trust
A trust may be created
- by every person competent to contract, and
- with the permission of a Civil Court, by or on behalf of a minor.
Who may be a Trustee
Every person capable of holding property may be a trustee. But if the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract. No one is bound to accept a trust. Acceptance of the trust by a trustee may be express or implied.
- A bequeaths certain property to B and C, his executors as trustees for D. B and C prove A’s will. This is in itself an acceptance of the trust, and B and C hold the property in trust for D.
- A transfers certain property to B in trust to sell it, and to pay out of the proceeds, A’s debts. B accepts the trust and sell the property. So far as regards B, a trust proceed is created for A’s creditors.
- A bequeaths, a lakh of rupees to B upon certain trusts, and appoints him his executor. B serves the lakh of rupees from the general assets, and appropriates it to the specific purpose. This is an acceptance of the trust.
Duties of Trustee
- The Trustee should execute the trust and obey the directions given in the instrument of the trust. He can make any alteration in those directions only with the consent of beneficiaries who are competent to contract. If a beneficiary is incompetent to enter into a contract, the Court may give consent on behalf of the minor.
- A, a trustee, is simply authorised to sell certain land by public auction. He cannot sell the land by private contract.
- A, a trustee of certain land for X, Y and Z, is authorized to sell the land to B for a specified sum. X, Y and Z, competent to contract, consent that A may sell the land to C for a lesser sum. A may sell the land accordingly.
- A, a trustee, for B and her children, is directed by the author of the trust to lend, on B’s request, trust property to B’s husband, C on the security of his bond. C becomes insolvent and B requests A to make the loan. A may refuse to make it.
- The trustee must protect and preserve the trust property.
Illustrations: The trust property is immovable property which has been given to the author of the trust by an unregistered instrument. The trustee’s duty is to cause the instrument to be registered.
- The trustee must not set up a title to the trust property, which is adverse to the interest of the beneficiary. Nor should he allow any person to do so.
- He must deal with the trust property in such a manner as a man of ordinary prudence would deal with such property as if it were his own.
- A, a trustee for B, in execution of trust sells trust property but for want of due diligence on his part, fails to receive part of the purchase money. A is bound to make good the loss.
- A, trustee for B, allows the trust to be executed solely by his co-trustee C. C misapplies the trust property. A is personally answerable for the loss resulting to B.
- If a trust is created in favour of several persons in succession and the trust property is of washing nature or consists of a future or reversionary interest, the trustee is bound to convert it into property of permanent nature.
Illustrations: A bequeaths to B all his property on trust for C during his life, and on his death for D, on D’s death for E. A’s property consists of three leasehold houses and there is nothing in A’s will to show that he intended the houses to be enjoyed in specie. B should sell the houses and invest the proceed in trust securities.
- The trustee must act impartially where there are more than one beneficiary.
- Where the trust is created for the benefit of several persons in succession and one of them is in possession of the trust property, if that person commits any act destructive or injurious to the trust property, the trustee must take the steps to prevent it.
- The trustee must keep an accurate account of the trust property. At the request of the beneficiary he must furnish him the account and the state of trust property.
- The trustee must invest the trust property and funds in the securities mentioned in Section 20 of the Act. This is subject to any contrary directions in the trust instrument.
- The trustee must sell the trust property within the specified or extended time without prejudice to the beneficiary or as authorized by the Court.
Liabilities of Trustees
- Liability for a breach of Trust: If a trustee commits a breach of the trust, he is liable to make good the loss which the trust property of the beneficiary has suffered. However, in two cases he is not liable for such a loss.
- Where the breach of the trust has resulted due to any fraud committed by the beneficiary; and
- Where the beneficiary, being competent to contract, has given his consent for that breach without any coercion or undue influence with full knowledge of the facts.
- A trustee improperly leaves trust property outstanding, and if it is consequently lost he is liable to make good the property lost, but he is not liable to pay interest thereon.
- A trustee is guilty of unreasonable delay in investing trust money in accordance with Section 20, or in paying it to the beneficiary. The trustee is liable to pay interest thereon for the period of the delay.
- The instrument of trust directs the trustee to invest trust money either in any of such securities or on mortgage of immovable property. The trustee does neither. He is liable for the principal money and interest.
- The trust property consists of land. The trustee sells the land to a purchaser for a consideration without notice of the trust. The trustee is liable at the option of the beneficiary, to purchase other land of equal value to be settled upon the like trust, or to be charged with the proceeds of the sale with interest.
- No right of set-off: A trustee who is liable for a loss because of a breach of trust committed by him in respect of one portion of the trust property is not allowed to set-off against his liability, a gain which he has accrued to another portion of the trust property through another and distinct breach of the trust property.
- A trustee is not liable for the acts and defaults of his predecessor.
- Generally a trustee is not liable for a breach of the trust committed by his co-trustee. However, such a trustee will be liable in the following cases:
- Where he delivers his trust property to his co-trustee without seeing to its proper application;
- Where he allows his co-trustee to receive the trust property and fails to make due inquiries about his co-trustee’s dealing therewith; and
- Where after he comes to know of the breach of the trust committed by his co-trustee, he either actively conceals it or does not take proper steps to protect the interest of the beneficiary.
- Nature of liability of a co-trustee: When co-trustees jointly commit a breach of trust, and when one of them, by his negligence, enables another trustee to commit a breach of trust, each trustee is liable to the beneficiary for the whole loss sustained by the beneficiary.
Rights, Powers and Disabilities of Trustees
- The right to have the possession of the instrument of trust and the title-deed relating to the trust property.
- The right to reimburse himself of all costs, expenses and liabilities incurred in administration of the trust.
- In case of a breach of the trust, the person who derives any benefit out of such a breach, must indemnify, the trustee to the extent of the amount actually received by him.
- A trustee has a right to take opinion, advice or direction from the Court on questions relating to the management and administration of the trust.
- When a trustee, properly completes his duties, he is entitled to get a discharge to the effect in writing.
- A trustee has a general right to do all necessary acts
- for preservation and protection of the trust property, and
- to protect the interest of a beneficiary who is not competent to contract
but he cannot give on lease any trust property for more than 21 years without the permission of a Court.
Powers of Trustee
- He can sell the trust property where instrument of the trust so empowers him.
- A trustee has a power to vary investments.
- A trustee has a power to apply the trust property for the maintenance of property as provided in the instrument of trust.
- A trustee can compromise claims unless a contrary intention appears from the instrument of the trust.
- A trustee can give receipt for the money received on account of the trust.
- In case of death of one of the trustees, the other trustees have a right to act, unless contrary intention appears from the instrument of the trust.