Can a trustee purchase a trust property?

INTRODUCTION:

In principle, a Trustee cannot buy the property of the trust in his own capacity and neither can any of his properties be sold to the trust – the mischief in both these scenarios being the likelihood of a conflict between his interest and his duties as a trustee. A trustee must not place himself in a position wherein a conflict might arise between his duty to manage the trust estate exclusively for the benefit of the cestuis que trust and his own personal interests.

While the Indian Trusts Act, 1882 lays down the provisions regarding the creation and general administration of the Trust, a situation may seldom arise wherein a Trustee may be required to act outside of his subservience to the beneficial interest. While the regulation may slightly differ in case of a Private Trust, primarily, there is no central regulation which controls this aspect in Public Charitable Trust as the same comes to be regulated by the laws of the respective State. However, what remains common is the general set of rights and duties a Trustee enjoys whilst in administration of the Trust.

Position in case of Private Trust:

A Private Trust is established for a specific purpose for certain beneficiaries who are identified under the instrument of trust. A Private terminates upon fulfilment of the purpose or on happening of any other event incidental thereto as enlisted in the Instrument of Trust.

The provisions of Section 51 and 52 of the Indian Trusts Act, 1882 clearly comprehend that a Trustee cannot use or deal with the Trust Property for his own profit and neither the trust property can be purchased by a trustee either directly or indirectly. It is a general rule established to keep the trustees from deviating from their line of duty, but they shall not derive any personal advantage from the administration of the trust property.

Position in case of Public Trust:

A Public Trust is set up for the benefit of general public at large. In case of a Public Trust, the beneficiaries are incapable of being ascertained. In case of dedication of a trust property to a Public Trust, it is essential that there be an unambiguous and definite intention to part with the trust property for charity for the benefit of the beneficiaries.

There is no central legislation governing the formation and functioning of Public Trusts in India and such public trust in India are established and administered under the state-specific legislation for Public Trusts adopted in that state and where there are no state-specific legislations, with guidance from the 1882 Act.

As per section 36A (3) & (4) of the Maharashtra Public Trusts Act, 1950 no trustee shall borrow money from a public trust property of which he is a trustee for his own personal use. The trustee shall also not borrow moneys for the purpose of or on behalf of the trust of which he is a trustee, except with the previous sanction of the Charity Commissioner, subject to conditions that may be imposed by him in the interest or protection of the trust.

As per section 41D (1) of the Maharashtra Public Trusts Act the Charity Commissioner may suspend, remove or dismiss any trustee of a public trust, if he, misappropriates or deals improperly with the properties of the trust of which he is a trustee; or accepts any position in relation to the trust which is inconsistent with his position as a trustee; and other conditions of the same section.

Case laws

1. K. Swaminatha Aiyar vs Jambukeswaraswami Temple And Ors. on 26 April, 1928

Facts: In this case, the trustee had fraudulently made a provision where after his death, his son shall either unanimously, or a majority of them, enjoy the properties as managing members and shall, out of the income thereof, conduct the charity permanently.

Issues: None of the trustees or the managing members of the charity who shall be conducting the charity shall have any right to alienate the same in any manner such as hypothecation, sale, gift, etc. The subordinate judge passed a decree in favour of the plaintiffs of the suit. The appeal is filed by Def. 1 of the said matter.

Judgement: The Trustee cannot buy the properties of the trust himself and he cannot sell any of his properties to the trust, the mischief in both the cases being the likelihood of a conflict between his interest and his duties as a trustee. The law does not go into the question of whether the transaction is beneficial or not.

2. M.V. Ramasubbier and ors. v/s Manicka Narasimhachari and ors. on 30 January,1979.

Facts: Mr. Iyer constituted an Annadanam Trust and became the first trustee for life and his son became the managing trustee of the trust. After the death of Mr. Iyer, his son transferred the trust property to his grandson. The plaintiffs filed the suit against them for selling the trust property.

Issue: The son of Mr. Iyer being the managing trustee of the trust, indirectly purchased it for himself by selling to his own son i.e. Grandson of Mr. Iyer.

Judgement: In this case, the apex court observed “That the trustee may not use or deal with the trust property for his own profit or for any other purpose unconnected with the trust and the equally important prohibition in section 52 that the trustee may not, directly or indirectly, buy the trust property on his own account or as an agent for a third person, cast a heavy responsibility upon him in the matter of discharge of his duties as the trustee.”

CONCLUSION:

Indian courts have consistently upheld the principle that trustees must avoid buying trust property to prevent conflicts of interest, as the trustee would be both the buyer and the seller of the property. Especially, to ensure that their actions remain in the best interests of the beneficiaries.

This article has been written by Ms. Prachi Shah, Associate, Ms. Trishka Khanna, Associate and Mr. Parth Tukaria, Associate from the Litigation Team, AAK Legal, Advocates & Solicitors.

Disclaimer – This article is meant for informational purposes only. The contents of this article are not to be construed as legal advice. The views expressed in the article are those of the authors and do not necessarily reflect the views of the firm. The copyright to the article rests solely with the authors and the firm.

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