SALE OF THE ASSETS OF A PUBLIC CHARITABLE TRUST WITHOUT OBTAINING COURT’S DIRECTION[1]
In the realm of legal discourse, a contentious issue persists regarding the authority of a trust to execute the sale of its assets absent explicit prior consent or directives from a judicial body. The question arises: does a trust inherently possess the autonomy to initiate asset sales independently, or is it legally bound to seek the imprimatur of a court before proceeding with such transactions? This matter has sparked considerable debate within legal circles, prompting numerous trusts to err on the side of caution by seeking judicial approval prior to asset disposition. However, it is pertinent to note that this requisite does not universally bind all trusts, whether they operate within the domain of public charitable endeavors or remain confined within the parameters of private interests. This article examines the underlying rationales justifying exemption from obligatory court involvement.
Relevant Statutory Provisions
Section 7 in the Charitable and Religious Trusts Act, 1920
Powers of trustee to apply for directions.-
(1) Save as hereinafter provided in this Act, any trustee of an express or constructive trust created or existing for public purpose of a charitable or religious nature may apply by petition to the court within the local limits of whose jurisdiction any substantial part of the subject-matter of the trust is situate, for the opinion, advice of direction of the court on any question affecting the management or administration of the trust property, and the court shall give its opinion, advice or direction, as the case may be, thereon: Provided that the court shall not be bound to give such opinion, advice or direction on any question which it considers to be a question not proper for summary disposal…
Section 7 of the Charitable and Religious Trusts Act, 1920 (hereinafter referred to as the “1920 Trust Act”) in India allows trustees of charitable or religious trusts to seek the opinion, advice, or direction of the court regarding the management or administration of the trust property. The trustee can file a petition in the court where a significant part of the trust property is located. The court has the discretion to provide immediate guidance or schedule a hearing. All relevant parties must be given a chance to be heard before the court renders its opinion, advice, or direction. If the trustee acts in good faith based on the court’s guidance, they will be deemed to have fulfilled their duty regarding the matter in question. Section 7(1) of the 1920 Trusts Act reads as follows:
Section 92 of the Code of Civil Procedure, 1908
Section 92. Public charities.
1(1) In the case of any alleged breach of any express or constructive trust created for public purposes of a charitable or religious nature, or where the direction of the Court is deemed necessary for the administration of any such trust, the Advocate-General, or two or more persons having an interest in the trust and having obtained the 2 [leave of the Court], may institute a suit, whether contentious or not, in the principal Civil Court of original jurisdiction or in any other Court empowered in that behalf by the State Government within the local limits of whose jurisdiction the whole or any part of the subject-matter of the trust is situate to obtain a decree…
(f) authorizing the whole or any part of the trust property to be let, sold, mortgaged or exchanged…
Section 92 of the Code of Civil Procedure, 1908 (hereinafter referred to as the “CPC”) envisages a case where there exists a breach of any express or constructive trust, which has been created for charitable or religious purpose or where a direction of court is necessary for the administration of such a trust. A suit may be filed and decree maybe obtained for various purposes, including the removal or appointment of trustees, authorization of specific trustee actions including sale of property of the trust, or approval of compromises or settlements related to the trust. Such other relief as a suit made under this section may require. The section also contemplates a suit where the court may pass a degree to alter the purposes for which a trust in the aforementioned nature is created in whole or in part.
Prior to filing the suit, permission from the court is required, and the court considers factors such as the suit’s nature, validity, benefit to the trust, and the applicant’s prima facie case. Notice of the suit must be given to the advocate general and, in certain cases, to the trust’s trustees. The court may also direct that notice be provided to other relevant parties. Section 92 aims to prevent the misuse or mismanagement of public charitable trusts by providing a legal mechanism for concerned individuals to seek appropriate remedies for the trust’s benefit and the public’s welfare. It ensures that such trusts are administered in accordance with their intended purpose.
Judicial Precedents
In the case of Chairman Madappa V. M.N. Mahanthadevaru and others 1966 AIR 878 SCR (2) 151: a five-judge bench of the Supreme Court while analysing Section 92 of the CPC, stated its main purpose to be “to give protection to public trusts of a charitable or religious nature from being subjected to harassment by suits being filed against them”, and noted that nature of the reliefs to be sought in a suit under s. 92(1) “show that a suit under s. 92 may be filed when there is a breach of trust or when the administration of the trust generally requires improvement.” The Hon’ble Court opined that “prayer for such a relief though permissible in a suit under s. 92 does not in any way circumscribe or take away from trustees or managers of public trusts the right of ordinary administration of trust-property which would include letting, selling, mortgaging or exchanging such property for the benefit of the trust. We cannot infer from the presence of such a relief being provided in a suit under s. 92(1) that the right of trustees or managers of the trust to carry on the ordinary administration of trust-property is in any way affected thereby. If this were so, it would make administration of trust-property by trustees or managers next to impossible.” While specifically discussing s. 92(1)(f) of the CPC relating to authorizing the whole or any part of the trust property to be let, sold, mortgaged or exchanged, the Court held that “that clause does not in our opinion have the effect of circumscribing the powers of trustees or managers to carry on ordinary administration of trust-property and to deal with it in such manner as they think best for the benefit of the trust and if necessary even to let, sell, mortgage or exchange it. It seems that Clause (f) was put in inter alia to give power to court to permit lease, sale, mortgage or exchange of property where, for example, there may be a prohibition in this regard in the trust deed relating to a public trust. There may be other situations where it may be necessary to alienate trust property which might require court’s sanction and that is why there is such a provision in Clause (f) in s. 92(1).” It thus held that “But that clause in our opinion was not meant to limit in any way the power of trustees or managers to manage the trust-property to the best advantage of the trust and in its interest, and if necessary, even to let, sell, mortgage or exchange such property.”
In a recent case of Shri Vanabasi Shri Ram Mandir Trust v. Raghavendra Sondur and Ors MANU/KA/3054/2020, the Karnataka High Court, while discussing the implications of Section 92 of the CPC and Section 7 of the 1920 Trust Act, noted the “express usage of the words “may” and not “shall” in Sec. 92 of CPC”, and therefore held that “it was clear that the said provisions were only directory and not mandatory and merely because the said provisions were invoked along with Sec. 3 and 7 of the Act of 1920, the said circumstance cannot be made the basis to come to the conclusion that the petition filed under Sections 3 and 7 was not maintainable on the ground that leave of the Court was not obtained by the petitioner.”
In Dalim Kumar Sain and others vs. Smt. Nandarani Dassi and another AIR 1970 Cal 292, the Calcutta High Court emphasised on the words “may apply” in Section 34 of the Indian Trusts Act, 1881[2] and held that the section “is no doubt there enabling a trustee to apply for direction of the Court on the simple questions touching the management or administration of the trust-property. But it is an enabling section, and no more. All it says is: ‘Any trustee may, without instituting a suit, apply by petition to a principal Civil Court of original jurisdiction…’ Not that any trustee must.”
In Ashok Kumar Gupta v. SitaLaxmi Sahuwala Medical Trust (2020) 4 SCC 321, a division bench of the Supreme Court while discussing when a leave to institute a suit under Section 92 may be granted, held conditions are required to be satisfied in order to invoke S. 92 and to maintain an action under S. 92 namely: (i) the Trust in question is created for public purposes of a charitable or religious nature; (ii) there is a breach of trust or a direction of court is necessary in the administration of such a Trust; and (iii) the relief claimed is one or other of the reliefs as enumerated in S. 92. Consequently, if any of these three conditions is not satisfied, the matter would be outside the scope of said Section 92. It placed reliance on the decisions in Sugra Bibi v. Hazi Kummu Mia AIR 1969 SCC 884 and Bishwanath v. Radha Ballabhjit AIR 1967 SCC 1044.
In Ashok Kumar Kapur v. Ashok Khanna (2007) 5 SCC 189, a division bench of the Supreme Court placed reliance on the case of Mohd. Hashim Gazdar AIR 1945 Sind 81 where it had been laid down as follows “The words “opinion, advice or direction” in Section 34, Trusts Act, must be read together as meaning nothing more than guidance. Under Section 34 the court exercised what may be called its consultative jurisdiction, giving guidance to a trustee who presumably asks for it, because he wants it and intends to follow it, Section 34 is intended to enable a trustee to obtain the court’s guidance in suitable matters for his protection. The advice, opinion or direction given under Section 34 is not an order binding on parties and disobedience to it does not involve committal for contempt…”
In A.R. Rengaraj and Ors. vs. Aranamanai Raman Chettiar Chathiram and Ors. MANU/TN/1700/2018, the court had held that S. 92 of the CPC must have a constructive and pragmatic interpretation, which “is to be arrived at with a harmonious consideration of the facts and circumstances and also the objects sought to be achieved through special provisions.” The Court here has emphasised on the need for constructive interpretation depending on the facts of the case.
In the case of Parsi Zoroastrain Anjuman, Mhow vs The Sub Divisional Officer/ The Registrar of Public Trusts & Ors. MANU/SC/0107/2022, the Hon’ble Supreme Court while interpreting the scope of powers of the Registrar of Public Trusts under Section 14 of the Madhya Pradesh Public Trusts Act, 1951 had set aside the decision of the Registrar in not allowing sale of the properties by the trustees and stated that “the principle of autonomy and democratic decision-making cannot be undermined. Any organization which is self-governed, cannot be subjected to overarching state control. As long as its decisions are well informed, and grounded on relevant considerations, the interests of the trust are those defined by its members. Any measure of public control enacted through express stipulations in law, should not be expanded to such an extent that the right to freedom of association, Under Article 19(1)(c), is reduced to an empty husk, bereft of meaningful exercise of choice.” Therefore, it may be concluded that the decision of the trustees in the interests of the trust should not be overly interfered with.
Conclusion
Obtaining permission of the court is not mandatory and is left to the discretion of the trustees. The laws relevant to address the query are Section 92 of the Code of Civil Procedure, 1908 and Section 7 in the Charitable and Religious Trusts Act, 1920. Section 92 of the CPC relates to application to the court by a public charitable trust in cases of alleged breach of trust or where a direction of court is necessary for the administration of such a trust for purposes including authorizing the whole or any part of the trust property to be sold. Section 7 of the 1920 Trusts Act allows trustees of charitable or religious trusts to seek the opinion, advice, or direction of the court regarding the management or administration of the trust property.
Both these provisions use the word “may” in their wording, implying that they are not mandatory provisions, and no trustee is bound to apply to the Court. This stance has been reaffirmed by a five-judge bench of the Supreme Court in the Chairman Madappa case where it held that Section 92 does not in any way take away from trustees of public trusts the right of ordinary administration of trust-property which would include letting, selling, mortgaging or exchanging such property for the benefit of the trust. It opined that the Section 92(1)(f) seemed to be put in to give power to court in cases for example, there may be a prohibition in this regard in the trust deed relating to a public trust and held that it was not meant to limit the power of trustees to manage the trust-property to the best advantage of the trust. In our case, the trustees have no such prohibition on them imposed by the Trust Deed.
There are several judicial decisions since which have upheld and reaffirmed the stance taken by the Supreme Court in the Chairman Madappa case. Courts have reaffirmed the directory nature of the provisions due to the words “may apply” and that the provisions are for mere guidance. Courts have also reiterated the importance of not exercising too much control over the decisions of the trustees. They have emphasised on the conditions required to invoke Section 92, one of them being the existence of a breach of trust or a direction of court is necessary in the administration of such a Trust, which is not the case here, making the matter to be outside the scope of Section 92.
In the facts and circumstances outlined above, it can be decidedly concluded that application for directions under Section 92 of CPC and Section 7 of the 1920 Trusts Act, is discretionary, not mandatory and no trustee is bound to apply. It is for the trustee to decide whether he considers it necessary to apply to the court for its ‘advice, opinion or direction’. The trustees are not bound to apply to the Court before selling their assets to third parties. They will not be in violation of any provision of law by virtue of their non-application.
Hence trusts need not approach the court before sale of its assets. It is however advised that the market value of the property be determined before effecting the sale in order to avoid future allegations of an undervalued transaction. It is also advised that the trustees pass a resolution regarding the sale of their assets, explicitly stating that such sale is for the benefit of the trust and provide detailed reasons supporting this decision. Further, it is advised that these averments be incorporated into the recitals of the sale deed to pre-empt potential legal challenges.
[1] Trisha Agarwala, Associate, Fox & Mandal LLP, Kolkata.
[2] Section 34 of the Indian Trusts Act, 1881, which is applicable to private trusts in India, is synonymous to Section 7 of the Charitable and Religious Trusts Act, 1920, and thus rationale used in Section 34 of the 1881 Act may be used in the present case for public trusts too.
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