Trustee: Who can be appointed?

Who can be appointed as Trustee?

As per Section 10 of the Indian Trusts Act, any person who is capable of holding property can be appointed as a trustee. A person is deemed to have the capacity to hold property, if such a person is capable of administering the property effectively and efficiently with ordinary prudence. Depending upon the nature of the trust, if trustee is required to play a passive role without any scope of discretion, a minor may as well be appointed as trustee.

However, where the trust involves exercise of discretion such as trustee acquiring sale of property or its investment, the trustee should be of the age of majority, of sound mind and should not be disqualified by any law.

A Corporation, a company or association of persons, being a ‘person’ may as well be appointed as trustee.

Can an NRI be appointed as ‘trustee’?

As per Section 10 of the Indian Trusts Act, every person capable of holding property may be a trustee; but, where the trust involves the exercise of discretion, he cannot execute it unless he is competent to contract. In terms of the provisions of Section 6(5) of FEMA 1999, a person resident outside India can hold, own, transfer or invest in Indian currency, security or any immovable property situated in India, if such currency, security or property was acquired, held or owned by such person when he was a resident in India or inherited from a person who was a resident in India.

Although there is no specific bar on appointment of an NRI as trustee of an Indian trust, certain provisions of the Indian Trusts Act, 1882 creates few restrictions on appointment of an NRI as trustee. For instance, Section 73 provides that-

“Whenever any person appointed a trustee disclaims, of any trustee, either original or substituted, dies, or is for a continuous period of six months absent from India, or leaves India for the purpose of residing abroad, or is declared an insolvent, or desires to be discharged from the trust, or refuses or becomes, in the opinion of a principal civil court of original jurisdiction, unfit or personally incapable to act in the trust, or accepts an inconsistent trust, a new trustee may be appointed in his place by…”

In the light of the above provision, a new trustee may be appointed in case the person is domiciled abroad for a period of more than 6 months continuously. It is considered a personal incapacity to act in trust. Therefore it did not disable him from office but he would be considered unfit for the office. In such a case the law presumes that a vacancy has occurred and authorizes appointment of a new trustee in his/her place. The prevailing law is silent on whether he/she is released from his obligations as a trustee by virtue of a fact of appointment of the new trustee in his place. Therefore, while it is not a provision that forbids the appointment of an NRI it certainly acts as an impediment to their appointment.

Similarly, another impediment to their appointment is created under Explanation I to section 60 of the Indian Trusts Act, 1882 according to which a person domiciled abroad is not considered as proper person to be appointed as a trustee.

“Section 60 – Right to proper Trustee

The beneficiary has a right (subject to the provisions of the instrument of trust) that the trust-property shall be properly protected and held and administered by proper persons and by a proper number of such persons.

Explanation 1.–The following are not proper persons within the meaning of this section:

A person domiciled abroad; an alien enemy: a person having an interest inconsistent with that of the beneficiary: a person in insolvent circumstances; and, unless the personal law of the beneficiary allows otherwise, a married woman and a minor…”

Section 60 lays down the propriety of certain trustees. However it does not in any way impose restrictions on the author. He may very well appoint a person who is considered “not proper” under the Act. This is because there can be no person considered more proper to determine the capability of the person to whom he transfers property[1].

No objection can be taken by the beneficiary as long as the conditions present in section 10 are not violated. Apart from the residential status of the trustee, what must be considered is, whether such residence would prevent him/her from properly administering the trust. The mere fact of his/her residence being abroad will not entitle the beneficiary to seek his/her removal as trustee. Some instances of bad administration or incapacity to administrate must be shown.  Similarly, the other grounds may be trustee being insolvent, using the trust property for his own benefit, or he neglects his duty and fails to keep accounts etc.

Furthermore, RBI has generally taken a view that as long as beneficiaries or trustees are non-residents, the trust should not undertake any activities which is prohibited for non-residents.

FEMA permits an NRI to contribute funds from his India-sourced funds to an existing private Indian family trust or settle an Indian trust for their Indian resident relatives.

Author: VIvek Kumar Verma

[1] Mukherkjee on the Indian Trusts Act by S.P. Sen Gupta, Kamal Law House, Kolkata, 4th Edn., 2009 at page 856