(First published on Linkedin)
In a recent decision, the NCLAT held that a settlor and a trustee are distinct for the purposes of determining ineligibility under Section 29A of the IBC for submission of a resolution plan – merely being the settlor of a family trust does not imply “management or control” over the trustee entity. Once the trust is constituted, the settlor parts with legal ownership, the property vests exclusively in the trustee, unless specific powers are expressly reserved.
A trust structure passes through many statutory lenses – the status and treatment of the trustee as the “owner” is not uniform across laws:
1. Indian Trusts Act: A trust is not a separate legal entity; the trustee is the legal owner, while beneficiaries have enforceable rights against the trustee and not an interest in the trust property itself. Indian law does not recognise a bifurcation between legal and equitable estates (Tagore v. Tagore).
2. Transfer of Property Act: The transfer of property into a trust is complete once the trustee receives title; from that point onwards, the trustee’s ownership is full and complete in the legal sense.
3. Income-tax Act: Under section 56(2)(x), the “relative” test applies between the contributor and the beneficiary, and the trustee’s status is disregarded. Tax is determined by the nature of the trust: in the case of a specific trust, income is taxed in the same form and manner as it would be in the hands of the beneficiaries, with the trustee’s status disregarded; in the case of a discretionary trust, income is taxed at the maximum marginal rate in the hands of the trust, with the beneficiaries’ status disregarded.
3. FEMA NDI Rules: As the trustee is the legal owner, the trustee’s residential status determines the applicable transfer conditions. At the stage of distribution, the residential status of the beneficiaries becomes relevant.
4. Companies Act and LODR: The trustee’s name is entered in the register of members in the capacity of a trustee, along with a declaration of the beneficial owner.
5. SEBI Takeover Code: Any transfer of more than 5% shares in a listed company by a promoter/ promoter group to a trust requires SEBI approval. Both the trustee and the beneficiaries must qualify as “immediate relatives” of the contributor to qualify for the exemption. Accordingly, in this context, the status of both the trustee and the beneficiaries is relevant.
Key takeaway: In regulatory analysis, it is critical to identify who the law treats as the “owner” – the answer may differ depending on the statute in question.
Further, from a succession planning perspective, a contributor, even if also acting as a trustee, ceases to have absolute ownership once the property is transferred into the trust and the ownership becomes annexed with a fiduciary obligation towards the beneficiaries.