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…..)