Legality Of Transfer Of Shares Of A Minor

1. INTRODUCTION

The 'Great Wealth Transfer' ("GWT") refers to an unprecedented global shift of $124 trillion from older to younger generations, with $44.8 trillion expected to be transferred in India, by 2048. This transition will significantly impact investment practices, wealth management, and asset transfer structures for both movable and immovable properties.

Despite structured transfers, rising sudden deaths in India have led to unplanned inheritances, often involving minors inheriting shares and other assets. Such cases create legal challenges, as minors may need to execute contracts or agreements to realize their inheritance actions that face validity issues under existing laws.

In this article we will be analysing the legal hurdles that may arise from GWT in an unplanned and sudden manner leading to minors inheriting assets including immovable and movable property such as shares in a company.

2. APPLICABLE LAWS IN INDIA

A. APPLICABLE LAWS

As per the Indian Contract, 1872¹ any individual under 18 years is considered a minor ("Minor"), hence, in instances where a Minor is required to execute legal documents, the law precludes them from doing so in their individual capacity.

While the Contract Act disqualifies minors from entering contracts, the Guardians and Wards Act, 1890 ("GWA") and the Hindu Minority and Guardianship Act, 1956 ("HGMA") has provisions enabling Minors to realize their inheritance with assistance from natural guardians.

The GWA is relatively straightforward as a court appointed guardian only can take actions with little ambiguity with respect to interpretation and execution. However, HGMA, has ambiguities as detailed below (Sections 3 and 4) followed by an analysis outlining implications and recommended actions (Section 5) for concerned stakeholders.

3. RELEVANT PROVISIONS WITH RESPECT TO NATURAL GUARDIAN

A. DEFINITION

HGMA² recognizes the following persons as natural guardians (collectively referred to as "Natural Guardians"):

1. In case of a boy or an unmarried girl — the father, then the mother, however a Minor below 5 (five) years of age shall ordinarily be with the mother; and
2. In the case of an illegitimate boy or an illegitimate unmarried girl — the mother then the father.

B. POWERS

The powers conferred upon Natural Guardians are as set out below:

1. To take all acts which are reasonable or necessary and proper for the realization, protection or benefit of the Minor's estate³.

C. RESTRICTIONS

1. Natural Guardian should not create a binding personal obligation on the Minor through any of their actions on behalf of the Minor⁴.
2. The Natural Guardian needs to obtain prior permission of the court for creating any charge, encumbrance, transfer or lease (exceeding 5 years or for a term more than one year beyond the date on which the Minor will attain majority) with respect to any immovable property inherited by the Minor⁵:
3. Any disposal of immovable property of a Minor by a Natural Guardian shall be voidable at the instance of a Minor or any person authorized to claim on behalf of the Minor⁶. Indian courts have further held such alienation to be void ab initio⁷, in alignment with the intent of HGMA to protect Minors from misuse of their estate by Natural Guardians while enabling them to realize their inheritance.
4. Courts will only grant permission to the Natural Guardian to take any acts in respect of immovable property as stated in point (ii) above, only in cases of necessity or if there is an evident benefit to the Minor⁸.

4. ANALYSIS OF LEGAL ISSUES AND JUDICIAL PRONOUNCEMENTS

A. LEGAL ISSUES

While it is straightforward that a court order is required to take any action in respect of Minor's immovable property, it is ambiguous whether a court order will be required for alienating movable property forming part of the Minor's estate such as shares of a company⁹("Shares"). Due to the lack of clarity, the following issues arise:

1. Definition of 'Minor's estate': The lack of definition of a Minor's estate creates confusion as common sense dictates that Shares will form part of a Minor's estate. However, without a definition, concluding the same may be detrimental. Since, a Minor is empowered to render any alienation of their estate voidable or void ab initio.
2. What action will be construed as evident benefit?: The lack of a definition or parameters to evaluate what will be considered for the evident benefit of the Minor may lead to numerous transactions being voidable or void ab initio at the instance of the Minor. Thereby, affecting the status of any transaction that may have been carried out in respect of a Minor's estate.

This lack of clarity will lead to the Natural Guardian and concerned stakeholders at the mercy of the court's interpretation and the Minor's claim towards movable property such as Shares, leaving any transaction involving movable assets of a Minor in legal limbo.

B. JUDICIAL PRONOUNCEMENTS

• Gautam R. Padival Vs. Karnataka Theatres Limited¹⁰

This case examined whether a Minor could become a member of a company as the Minor cannot enter into a contract. Basis analysis of the facts and applicable law it was held that a Minor can become a member of a company they hold Shares, with the Natural Guardian executing contracts on their behalf.

• Daiichi Sankyo Company Limited vs. Malvinder Mohan Singh and Ors.¹¹

This case analyzed whether joint and several liability for fraudulent sale of Shares can be placed upon Minors when Natural Guardian effected such sale. The Delhi High Court, while upholding the arbitral award established the following principles:

1. Shares of a Minor can be transferred by the Natural Guardian for good consideration, in line with 'evident benefit' principle mentioned in HGMA; and
2. No liability for a fraudulent transaction by the Natural Guardian can be placed upon the Minor.

The Securities Appellate Tribunal¹²concurred with the above judgement observing that sale of Shares of a Minor by a Natural Guardian can be effected for good consideration.

Therefore, a Natural Guardian must secure fair consideration before acting on a Minor's estate and concerned Stakeholders should conduct due diligence to ensure there is no fraud before executing transactions involving Minor's movable assets.

Upon an analysis of the above-mentioned precedents it can be observed that Shares are treated as 'minor's estate'¹³, therefore any action being taken by a Natural Guardian in respect of Shares of a Minor shall be governed by provisions of HGMA.

However, there is still limited judicial interpretation to address the ambiguity of what will be treated as 'evident benefit' for the Minor. The Karnataka High Court¹⁴ while upholding the validity of alienation of immovable property of a Minor by his sibling, held that such alienation of immovable property towards discharging antecedent debts of the Minor is for the evident benefit of the Minor, being the sole precedent.

Despite efforts by judicial authorities to clarify certain legal ambiguities in HGMA there is still a lot left to be desired to completely resolve said ambiguities.

CONCLUSION

From an analysis of the precedents and relevant provisions set out above, we can conclude that the following are the relevant aspects to be considered while dealing with the assets of a Minor:

1. Shares of a company and other movable property will be treated as 'minor's estate' under HGMA.
2. A Natural Guardian may act on behalf of the Minor's estate only for the evident benefit of the Minor. If there is any ambiguity with respect to evident benefit of the Minor then it is prudent to obtain prior court permission.

Therefore, it can be stated that Shares of a company and by virtue other movable assets inherited by a Minor will be construed as 'minor's estate'. Hence, in practice, where minors inherit Shares, Natural Guardian can transfer them only if the transaction demonstrably benefits the Minor. However, since interpretations vary, obtaining court approval for any transaction involving movable and especially immovable property remains the most prudent safeguard from the transaction being held as voidable or void ab initio at the instance of a Minor's claim of ownership.

Footnotes

1. Section 11 of the Indian Contract Act, 1872 ("Contract Act").

2. Section 6 of HGMA.

3. Section 8(1) of HGMA.

4. Ibid.

5. Section 8(2) of HGMA.

6. Section 8(3) of HGMA.

7. Madhegowda (Dead) by LRS. v. Ankegowda (Dead) by LRS. and Others, (2002) 1 SCC 178.

8. Section 8(4) of HGMA.

9. Section 44 of Companies Act, 2013.

10. Gautam R. Padival vs. Karnataka Theatres Limited, (16.12.1999 - CLB) : MANU/CL/0010/2000.

11. Daiichi Sankyo Company Limited vs. Malvinder Mohan Singh and Ors. (31.01.2018 - DELHC) : MANU/DE/0405/2018

12. In Re: Unnao Trading Private Ltd. and Ors. in the matter of Gremach Infrastructure Equipments and Projects Limited (06.02.2019 - SEBI / SAT) : MANU/SB/1779/2019, Para 38

13. Section 8(1) of the HGMA

14. A. Chidananda v. Lalitha V. Naik and Ors., AIR 2006 Kant 128