FAMILY SETTLEMENTS – PART I

INTRODUCTION

Maximum disputes
take place within family members rather than among strangers! Family fights have been popular in India right from the times of
“the Mahabharata”. The fight between the Kauravas and the Pandavas is something
which several Indian families witness on a regular basis. As family businesses
grow, new generations join the business, new lines of thinking originate,
disputes originate between family members and gradually it gives rise to a
family settlement / arrangement.

Corporate India has
witnessed a spate of family feuds in almost all major corporate houses.   A family arrangement is one of the oldest
alternative dispute resolution mechanisms which is known. The scope of a family
arrangement is extremely wide and is recognised even in ancient English Law.
This is because the world over, Courts lean in favour of peace and amity within
the family rather than family disputes. 
In the last about 60 years, a good part of the law relating to Family
Arrangement / Settlement is well settled through numerous court decisions
including several decisions of the Supreme Court. It is ironic that in a
country where a substantial part of businesses are run and owned by joint
families, there is no legislation which governs or regulates such family
settlements or arrangements. Hence, the entire law in this respect is case-law
made. 

WHAT IS A FAMILY SETTLEMENT / ARRANGEMENT? 

It is important to
analyse the basic principles governing family settlement involving properties
held mainly by individuals. Various Courts, including the Supreme Court of
India, have laid down the basic principles relating to family arrangements. Halsbury’s
Laws of England also lays down some important principles in this respect:

“The agreement
may be implied from a long course of dealing, but it is more usual to embody or
to effectuate the agreement in a deed to which the term “family
arrangement” is applied. Family arrangements are governed by principles
which are not applicable to dealings between strangers.

When deciding
the rights of parties under a family arrangement or a claim to upset such an
arrangement the court considers what in the broadest view of the matter is most
in the interest of the family, and has regard to considerations which, in
dealing with transactions between persons not members of the same family, would
not be taken into account. Matters which would be fatal to the validity of
similar transactions between strangers are not objections to the binding effect
of family arrangements. …………”

CONCEPTS AND PRINCIPLES OF FAMILY ARRANGEMENTS / SETTLEMENT

From the analysis
of the numerous judgments, such as Maturi Pullaiah vs. Maturi Narasimham,
AIR 1966 SC 1836; Sahu Madho Das vs. Mukand Ram, AIR 1955 SC 481; Kale vs. Dy.
Director of Consolidation, (1976) AIR SC, 807; Hiran Bibi vs. Sohan Bibi, AIR
1914 PC 44; Hari Shankar Singhania vs. Gaur Hari Singhania (2006) 4 SCC 658,
etc., the concepts and principles of family arrangement are summarised
below :

(a)   A
family arrangement is an agreement between members of the same family intended
to be generally and reasonably for the benefit of the family either by
compromising doubtful or disputed rights or by preserving the family property
or the peace and security of the family by avoiding litigation or by saving its
honour.

(b)    If the arrangement of compromise is one
under which a person, having an absolute title to the property, transfers his
title in some of the items thereof to the others, the formalities presented by
law have to be complied with since, the transferees derive their respective
title through the transferor. If, on the other hand, the parties set up
competing titles and differences are resolved by the compromise, there is no
question of one deriving title from the other and, therefore, the arrangement
does not fall within the mischief of section 17 read with section 49 of the
Registration Act, as no interest in property is created or declared by the
document for the first time. It is assumed that the title had always resided in
him or her, so far as the property falling to his or her share is concerned,
and therefore, no conveyance is necessary.

(c)    A
compromise or family arrangement is based on the assumption that there is an
antecedent title of some sort in the parties and the agreement acknowledges and
defines what that title is, each party relinquishing all claims to property
other than that falling to his share and recognising the right of the others,
as they had previously asserted it, to the portions allotted to them
respectively. That explains why no conveyance is required in these cases to
pass the title from one in whom it resides to the person receiving it under the
family arrangement. It is assumed that the title claimed by the person
receiving the property under the arrangement had always resided in him or her
so far as the property falling to his or her share is concerned and therefore
no conveyance is necessary.

It does not mean
that some title must exist as a fact in the persons entering into a family
arrangement. It simply means that it is to be assumed that the parties to the
arrangement had an antecedent title of some sort and that the agreement
clinches and defines what that title is.

(d)    A compromise by way of family settlement is
in no sense an alienation by a limited owner of family property. Once it is
held that the transaction being a family settlement is not an alienation, it
cannot amount to the creation of an interest. For, in a family settlement each
party takes a share in the property by virtue of the independent title which is
admitted to that extent by the other parties. 

(e)    In the usual type of family arrangement,
unless any item of property which is admitted by all the parties to belong to
one of them is allotted to another, there is no ‘exchange’ or other transfer of
ownership.

(f)     By virtue of a family settlement or
arrangement members of a family descending from a common ancestor or a near
relation seek to sink their differences and disputes, settle and resolve their
conflicting claims or disputed titles once for all in order to buy peace of
mind and bring about complete harmony and goodwill in the family. Family
arrangements are governed by a special equity peculiar to themselves, and will
be enforced if honestly made.          

The object of the
arrangement is to protect the family from long-drawn out  litigations or perpetual strifes which mar
the unity and solidarity of the family and create hatred and bad blood between
the various members of the family.

A family settlement
is a pious arrangement by all those who are concerned. A family settlement is
not within the exclusive purview of Hindus, but applies equally to various
other communities also, such as Parsis, Christians, Muslims, etc.

(g)    The term “family” has to be
understood in a wider sense so as to include within its fold not only close
relations or legal heirs but even those persons who may have some sort of
antecedent title, a semblance of a claim.

It is not necessary
that the parties to the compromise should all belong to one family. The word
‘family’ in the context of a family arrangement is not to be understood in a narrow
sense of being a group or a group of persons who are recognised in law as
having a right of succession or having a claim to a share in the property in
dispute. If the dispute which is settled is one between near relations then the
settlement of such a dispute can be considered as a family arrangement.

Even illegitimate
and adopted children would be covered within the broader definition of the term
“family”. Thus, a settlement arrived at in relation to a dispute between
legitimate and illegitimate children would also be covered within the ambit of
a family settlement. Children yet to be born may also be covered.

(h)    Courts have made every attempt to sustain a
family arrangement rather than to avoid it, having regard to the broadest
considerations of family peace and security. It is not necessary that every
party taking benefit under a family settlement must necessarily be shown to
have, under the law, a claim to a share in the property. All that is necessary
is that the parties must be related to one another in some way and have a
possible claim to the property or a claim or even a semblance of a claim on
some other ground as, say, affection.

(i)     The said settlement must be voluntary and
should not be induced by fraud, coercion or undue influence.

(j)     The family settlement must be a bona
fide one so as to resolve family disputes and rival claims by a fair and
equitable division or allotment of properties between the various members of
the family. The bona fides and propriety of a family arrangement have to
be judged by the circumstances prevailing at the time when such settlement was
made.

(k)    Even if bona fide disputes, present
or possible, which may not involve legal claims are settled by a bona fide
family arrangement which is fair and equitable the family arrangement is final
and binding on the parties to the settlement. 

 (l)    It
is not necessary that there must exist a dispute, actual or possible in the
future, in respect of each and every item of property and amongst all members
arrayed one against the other. It would be sufficient if it is shown that there
were actual or possible claims and counter-claims by parties in settlement
whereof the arrangement as a whole had been arrived at, thereby acknowledging
title in one to whom a particular property falls on the assumption (not actual
existence in law) that he had an anterior title therein. 

(m)   The consideration for such a settlement, if
one may put it that way, is the expectation that such a settlement will result
in establishing or ensuring amity and goodwill amongst persons bearing
relationship with one another.

(n)    The family arrangement may be even oral.

(o)    A family arrangement might be such as the
Court would uphold although there were no rights in dispute, and if sufficient
motive for the arrangement was proved, the Court would not consider the
adequacy of consideration.

(p)    If in the interest of the family properties
or family peace the close relations settle their disputes amicably, the Court
will be reluctant to disturb the same. The Courts lean strongly in favour of
family arrangements that bring about harmony in a family and do justice to its
various members and avoid, in anticipation, future disputes which might ruin
them all.

(q)    The essence of a family arrangement is an
agreement on some areas of dispute by the family members. The agreement is for
the benefit of all the members. The ultimate aim of the agreement is to
preserve amity and goodwill within the family and avoid bad blood. However,
every document cannot be styled as a family arrangement. For example, if the
patriarch of a family makes a will under which he divides his personal shares
in various businesses and family properties among his family members, then the
same cannot be called a family arrangement as it is merely a distribution of
the deceased’s estate as per his will. One of the key requirements for a family
arrangement is the existence of a dispute or a possible dispute. Under a will,
there is no consideration for the acceptance of arrangement.

(r)     A family settlement is different from an
HUF partition. While an HUF partition must involve a joint Hindu family which
has been partitioned in accordance with the Hindu Law, a family arrangement is
a dispute resolution mechanism involving personal property of the members of a
family who are parties to the arrangement. A partition does not require the
existence of disputes which is the substratum for a valid family arrangement.
An HUF partition must always be a full partition unlike in a family settlement.         

(s)    The question of whether a Muslim family can
undergo a family settlement has been the subject matter of various judicial
decisions. All of these have upheld the validity of the same.

(t)     If one of the family members voluntarily
gives up his share in the joint family property, i.e., he styles a gift deed as
a deed of family settlement, then it is not a case of a valid family
arrangement. Any settlement which does not envisage a dispute cannot be a
settlement. 

(u)    If the terms of the settlement are clear and
unambiguous and are not impossible to perform, then the plea of practical
inconvenience cannot be raised at the stage of implementation. That factor must
be considered at the stage of entering into the settlement and not later.

(v)    Principles governing a family settlement are
different from commercial settlement. These are governed by a special equity
principle where the terms are fair and bona fide taking into
consideration the well-being of the family. Technical considerations like the
law of limitation should give way to peace and harmony in the enforcement of
settlements. The duty of the court is that such an arrangement and the terms
should be given effect to in letter and spirit. 

(w)    Consideration is one of the important
aspects of any contract. Under the Indian Contract Act, any contract without
consideration is null and void. In the case of a family settlement, the
consideration is the giving up of mutual claims and rights and love and
affection. In India, the Courts do not enquire into the adequacy of consideration
as in the case of USA. 

EXAMPLES OF A VALID / INVALID FAMILY SETTLEMENT.

(a)    A father has started a
business in which he is later on joined by his two sons. All the assets and
business interests are jointly owned by the family. After several years,
disputes arise between the two sons as to who is in command and who owns which
property. This leads to a lot of bad blood and ill-will within the family. In
order to buy peace and avoid unnecessary litigation, the father, the two sons
and their families effectuate a family settlement under which all the
businesses and properties are equally divided between the two brothers’
families. This is a valid family settlement and would be recognised in a court
of law.

(b)    A father and son are joint in business. The
son has played an active role in the business and in creating the wealth. After
many years, the two develop a bitter dispute over various issues with the
result that the son wants to opt out of the business. The son gives up all his
rights and interest in the family properties and in return for the same the
father pays him some money. This is a valid family settlement.

(c)    A family settlement is purported to have
been executed by all the family members of a particular family. However, the married
daughter has not signed the family settlement MOU. In such a case, it cannot be
said that the family settlement would bind the daughter – Sneh Gupta vs.
Devi Sawarup(2009) 6 SCC 194.    

WHAT PROPERTIES CAN BE COVERED? 

From the various
principles laid down regarding valid family arrangements, it is clear that
valid family arrangements can relate to self-acquired properties, or other
properties of the family. It is neither a pre-requisite nor even a necessary
condition that a valid family arrangement must relate to ancestral property
only. An analysis of the various Case Laws, such as, H. H. Vijayaba,
Dowager Maharani Saheb, 117 ITR, 784 (SC); Narayandas Gattani, 138 ITR 670
(Bom); Ziauddin Ahmed, 102 ITR 253 (Gau); Shanti Chandran, 241 ITR 371 (Mad),
etc., reveals that even where the property involved in the family settlement
was other than an ancestral property, and the family arrangements were held to
be valid:

(a)    The property involved was that of the
relatives of the partners of a firm, which firm had mounting creditors.  These relatives conveyed their properties for
the benefit of the creditors of the firm to discharge debts incurred by the
firm. It was held that the conveyance amounted to a valid family arrangement
and hence was not exigible to gift tax.

(b)    An oral family arrangement, made by father,
during his lifetime, under which he directed a larger share to one son out of
his self-acquired non-ancestral property was held to be a valid family
arrangement.

(c)    The property involved was certain joint
family land.  Major part of the property
was apportioned to the sons of the Karta. It was held that the transaction was
a family settlement.

(d)    Payments promised under a family arrangement
to be made to the assessee’s son out of the assessee’s private property, was
held to be a valid family arrangement.

(to be continued…..)