Updated: May 18, 2021
Disputes among members of business families have been the stuff of numerous novels and films, except for providing headlines in daily newspapers. Various families have ruined themselves fighting until the closing stages, the last scene of which is usually performed in the court. The judiciary is generally averse to enter into the paddle because the law should come after everything else in family relations. The same view has been reiterated in the present state of affairs when compared to the days of Privy Council. The concept of family arrangement is applicable to all the communities in which there is a common unit, common mass and the practice of joint living. Consequently, so long as the arrangements are made for settling the disputes with or without litigation, the validity cannot be questioned. Only when the dispute cannot be settled by way of family settlement, is adjudication by the way of arbitration possible.
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 right or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour. 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 agreement is applied.
Family arrangements are governed by principles which are not applicable to dealing 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.
Considerations which will lead a court to support a family arrangement are that as a result of the family arrangement disputes are avoided in the family, the honour of the family is safeguarded, or various obligations, morally binding on a family, are provided for, or family property is continued in the family
What is Family Settlement?
Family settlements serve a dual role: the distribution of wealth and the allocation of different business lines among family members.
Indian law attributes no legal definition or form to the concept of family settlements. However, the courts do recognise family settlements and have generously interpreted them by attributing a wide scope of meaning to the term 'family'. In general, any person with a remote antecedent title to a family's property can participate in a family settlement. The courts have also acknowledged antecedent titles in favour of outsiders based solely on the fact that at least one family member relinquished their claim in such outsiders' favour and recognised them as the sole owner of the subject property under a family settlement
Validity of family settlements
Family settlements are rarely invalidated, as the courts accord sanctity to their principal objectives of avoiding disputes and ensuring cordial family relations. Family settlements are likened to agreements under the law. Hence, they must satisfy all of the requirements of a legally enforceable agreement, such as the absence of fraud, undue influence or coercion. This is also why settlement memoranda cannot provide for future transfers which are contingent on the survival of certain family members until such future time, as uncertainties render agreements void.
Should it be registered? According to Section 17 of the Indian Registration Act, if it is a written agreement it should be registered to be admissible in court. In case of a written agreement, which is intended to serve as a proof for a particular arrangement, or where legal rights of the members changes, or the transfer or distribution of immovable property is involved, the document needs to be mandatorily registered.
Can an agreement be challenged? An agreement, once it has been executed, cannot be revoked without a court decree, but it can be challenged in court. It can be challenged on the grounds of fraud, coercion, misrepresentation of facts and improper execution, among others.
How are will and agreement different? Neither instrument is legally superior nor better than the other because the purpose and execution of both are completely different. While a will decides how a person wants his assets to be distributed after his death, the purpose of an agreement is to avoid disputes over inheritance through an amicable consensus among the family members. So an agreement often helps deal with contentious issues arising from a will. While there are more strict legal requirements for drawing up a will compared with an agreement, the latter enjoys high sanctity and credence in courts.
Family Settlements and Tax Planning
The utility of the instrument of family settlement for tax planning may be examined in the context of: (1) joint family properties, and (2) individual properties.
1. Joint Family Properties: In the case of joint family properties, the most commonly used media of tax planning is effecting complete or total partition. It has also been held that even unequal partition can be effected by the father or with consent of all the coparceners, and only the concerned parties aggrieved by it can challenge the same till then it is valid.
2. Individual Properties: In the case of individual properties, whether in respect of Hindus or other communities, there can be a valid family settlement. The other family members can have claims in the estate either on account of rights of maintenance or otherwise and in settlement of such claims a family arrangement can be arrived at which will be considered to be one for a valid consideration and, therefore, such a settlement will not fall within the ambit of Section, 64 of the Income Tax Act, 1961. Such a transaction is clearly with and for a valid consideration. Obligations regarding maintenance are to be found under the general law and specifically, under the Hindu Adoption and Maintenance Act, 1956 and if any settlement takes place in this connection, it will be for a valid and valuable consideration. It is also significant that in case of family settlement, the Courts have gone so far as to hold that such family settlements do not amount to a transfer.
Non Hindus and family settlements
It may also be noted that in the case of non-Hindus also family settlements can be arrived at between the members of the family. If there are disputes, whether the properties are individual properties or joint family properties, such disputes can on filing suits and then arriving at some family arrangement be settled and property transferred to other members which will not attract gift tax or capital gains tax nor invite Registration. Of course, now after 1-4-1997, gift tax levy is abolished.
Can the concept of family arrangement be extended to firms and companies?
Family arrangement can be arrived at amongst individuals and not between Companies. The shareholders and the Company are separate and distinct persons and the shareholders have no interest in the business of the company. However, one can think of a family arrangement between the partners in respect of their share, if the partners were/are members of the family because the firm is not a legal person other than its partners. The partners are the real owner of the assets of the firm. The firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the firm belong to and are owned by the partners of the firm.
Is there a transfer?
The courts have not viewed family settlements as transfers subject to capital gains tax in the hands of the transferor. This is likely due to the voluntary nature of family settlements, which implies that persons who receive property (in cash or in kind) are unlikely to receive more than they relinquish. Thus, the provisions regarding the receipt of property without adequate consideration or consideration in excess of the value surrendered do not apply in the context of family settlements. However, this interpretation may not apply where a transfer pursuant to a settlement is undertaken by a company (i.e., family business) or another third party and not by family members, who would be the only parties to the settlement
How important is consensus amongst family members and avoid conflict and heart burns? Can one have out of court solutions?
Use of Family arrangement in Estate Planning
Estate planning involves planning for how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated.
Estate planning law in India is complex and multi-layered as it requires simultaneous consideration of various laws including community specific succession laws (which treat Hindus, Muslims, Christians and other religions differently for the purposes of testamentary as well as intestate bequeathals), currency control regulations (which impose restrictions on the manner in which non-residents can own/transfer Indian property or Indian residents can plan their offshore wealth) and tax laws (which are constantly changing and broadening in scope). These, combined with conflict of law principles applicable to family members dispersed across countries, makes the structuring exercise complex and challenging.
A good way to overcome some of the inadequacies of a will and unpleasant litigation could be a family agreement, which is also known as family settlement or arrangement.
When it comes to estate planning, every well-meaning Chartered Accountant, lawyer or financial adviser suggests writing a will to avoid family disputes over inheritance. However a will, whether registered or not, can not only be challenged by family members in the court of law, but is also an expensive, tedious and time-consuming process to settle family discords. A good way to overcome some of the inadequacies of a will and unpleasant litigation could be a family agreement, which is also known as family settlement or arrangement. Considerations which will lead a court to support a family arrangement are that as a result of the family arrangement disputes are avoided in the family, the honour of the family is safeguarded, or various obligations, morally binding on a family, are provided for, or family property is continued in the family.
We may now have a look at the concept of family settlement and the basis on which the same is recognized as valid and binding between the parties. It is often found that between members of the family claims and counter-claims are made against one another in respect of properties held by the members of the family and claims of ownership, maintenance, etc. are canvassed. With a view to avoid protracted litigation and exposure to public gaze of private family disputes, very often the family members try to bring about an amicable settlement of the family differences by invoking the assistance of a well-wisher of the family and arrive at a settlement of their mutual rights and obligations. Such family settlements may result in transfer of properties or recognition of the rights of some members of the family in various properties in dispute or may create limited rights in respect of such properties in favour of various members of the family.
The word “family” is not to be interpreted in the narrow sense of members of a joint Hindu family as defined in Hindu Law but it would include wide range of persons who belong to one family in its comprehensive sense. The basis on which such family settlements are held as valid and binding between all parties is the mutual consideration which flows between the parties while putting an end to the claims and counter claims between them. It has been held under the law of contract that it is lawful consideration for a party when he gives up his claim to any property in return for any payment or transfer of property made to him or any obligation undertaken by the party. Existence of the right in the property is not necessary in order to make the family settlement valid and binding for a valuable consideration.
The existence of the dispute or a threatened dispute between the members of the family is considered to be a precondition for a valid family settlement and such disputes and the consequent giving up of claims and counter-claims between the various members of the family constitutes good and valid consideration between the parties for enforcement of the rights and obligations created by such a family settlement. The family settlement, therefore, is not founded on existing rights or liabilities but rather on existing claims and disputes between the parties which are amicably resolved notices may be given by contending parties, even suits may be filed matters may be referred to arbitration and award may work out as family settlement.
“Courts give effect to a family settlement upon the broad and general ground that its object is to settle existing or future disputes regarding the property amongst members of the family. The word “family” in the context is not to be understood in a narrow sense of being a claim to share in the property in dispute”.