Introduction to Family Settlement Agreement

Aditya Pratap is a lawyer practicing in the Bombay High Court. He can be reached at aditya@adityapratap.com

A Family Settlement Agreement 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.

In simpler terms, in case of a family settlement, it is not sine qua non for a party receiving any material benefit out of a family settlement to be recognized by the law, making such a claim of share in the property. The one single objective such family arrangement or settlement is to bring an end to the dispute among the family members and to avoid any prolonged litigation which could have been avoided in the first place.

Who can execute a Family Settlement Agreement?

Indian law attributes no legal definition or form to the concept of family settlements. However, the courts do recognize family settlements and have generously interpreted them by attributing a wide scope of meaning to the term ‘family’. Basically, any person with a remote antecedent title to a family’s property can participate in a family settlement.

Registration for Family Settlement Agreement

While there is no legal requirement for a written family settlement document to be registered, this is generally predicated on whether the settlement memorandum:

  • On a family arrangement that can be arrived either orally or it can be reduced down in writing. Section 17 of the Registration Act, 1908 provides for documents which have to registered compulsorily.
  • or merely acknowledges an antecedent title to the property.

If the former applies, the memorandum will have to be registered. Oral family settlements bypass any registration requirements, however, such settlements will need to be corroborated with other evidence if their existence needs to be proven in court. Documents which should have been registered but were not are usually not permissible as evidence in court.

However, the Supreme Court in Thulasidhara v Narayanappa allowed an unregistered memorandum of family settlement as corroborative evidence. The court went on to hold the memorandum against a family member who did not refute its contents, but assailed it solely on the point of non registration.

The said agreement needs to adhere to the basic principles of contract law. A family arrangement cannot be arrived at forcefully. The said agreement must be voluntary and should not be induced by fraud, coercion or undue influence. Such agreement will be voidable at the option of the promisee.

When does the need for an Family Settlement Agreement arise? 

1. Testamentary Succession of Partition through Will

Nothing in the Hindu Succession Act 1956 or the Indian Succession Act, 1925 restricts the persons to whom ‘a testator may bequeath his or her self-acquired or self-owned properties over which he or she has full disposing power, though personal law restricts devolution of inherited ancestral property’. Thus, inheritance rights of self-acquired property are ascribed by the intention of the person executing the will. Here, the method of distribution prescribed by the personal law of the deceased is irrelevant and superseded by the intention of the testator. 

2. Intestate Succession of Partition without Will

When the holder of the property dies before preparing a will, his intention of how the property should be distributed is unknown. In such cases, the property distribution follows the law of inheritance applicable to the deceased. 

The issue arises when an Family Settlement Agreement and a will or other partition deed prescribe different modes of the partition of the same family property. A mutually prepared agreement should be of preponderance, considering that it involves the explicit consent of the family members, and is less likely to be contested. Yet, the issue is whether it can legally supersede existing inheritance rights. 

Important Judgement under Family Settlement Agreement

  • In Maturi Pullaiah v. Maturi Narasimham, the court held that conflict of legal claims in present or in future is generally not necessarily a condition for the validity of family arrangements.

Members of a joint Hindu family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an agreement is entered into bona fide and the terms thereto are fair in the circumstances of a particular case, the courts would more readily give assent to such an agreement than to avoid it.

  • In the case of Commissioner of Income Tax v. A.N. Naik Associates by the Memorandum of Family Settlement, the court held on the distribution in terms of the family settlement, as decided by the parties concerning various matters relating to business and assets which are to be divided separately and partitioned.

Under the terms and condition of the settlement, it was set out that the assets proposed to be divided in partition under the settlement were held by the firms and the individual partners. With reference to the firms, the manner in which the firms were to be reconstituted by retirement and admission of new partners was also set out.

Based on these documents and subsequent deeds of retirement of Partnership an order of the assessment was made holding that the respondents was liable for tax on capital gains. The Tribunal held that the business continued to be run and there was no dissolution of the firm and consequently Section 45(4) of the Act was not attracted.

About the Author – Aditya Pratap

Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.

Cases argued by Aditya Pratap can be viewed here.

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