A person builds up a business by sheer dint of hard work and determination to succeed. Even one or two generations later, all the hard work put in by the founder is frittered away, either because of the unwillingness of the next generation to get involved in the business in the proper spirit, or because of internecine disputes, where each person or faction wants to do things in a particular manner, leading to the death knell of the business.
It is precisely because of this reason that it becomes extremely necessary that there should be a succession plan in order to see that not only do the heirs get their inheritance, but more importantly, the transition of the business from one generation to the next is without any major conflicts.
I propose to address the issue from the point of view of having a proper succession plan, and not the methodology of planning, as space constraints dictate brevity in this short opinion.
In India, at least a fifth of the businesses are family owned, in the form of proprietary, HUF’s or partnerships. That itself is a substantial chunk of the overall economy in terms of business or commerce.
2 modes of Succession: From the point of view of succession itself, as is evident, there are two modes of succession; testamentary and intestate. When a person makes a will, it is testamentary, whereas when a person dies without having made a will, it is intestate succession, where the personal law governing the person comes into prominence and governs.
Will as a tool for succession planning: A will can be a good tool for passing on assets to immediate family members. So far as succession planning to a business is concerned, though it can be done by a will, it is desirable to have a separate succession plan also , so far as business is concerned. This can take the form of a separate succession planning strategy which is put on paper and be made known to the probable successors and also to those who are involved with the day-to-day business affairs. If, however it is done through a will, let us examine the various entities in conjunction with a will as a tool of succession planning to business.
1. Will & proprietorship business: If the business of the testator is run as a proprietary concern, a will is a good option. The testator can mention in the will itself as to what he or she intends to do with the business and to whom it goes to. If it is to be run by more than one heir, it can be mentioned as such . If the testator does not want to spell out the modalities of running the business in the will, a good option is also to have a separate document where such modalities could be mentioned amongst other things. A proprietary business succession may not pose many challenges in its execution, as it is essentially what we can call ‘a one man show’.
2. Will and business carried on by a HUF: In any business run by a Hindu Undivided Family, though all members may have a stake, it is essentially the ‘Karta’ or manager who takes the major decisions and runs the show. Each member of the family who is involved in the business has well assigned roles. So far as succession is concerned, it is of course the Hindu Succession Act which governs the field. This is of course in the case of intestate succession. The act however also recognises through section 30, that a Hindu can execute a will qua any assets which is capable of being so disposed of . This means that a Hindu can also deal with his share of the family or coparcenary assets. Therefore even a share of the business of the HUF could be dealt with in the will. Of course, in the absence of a structured succession plan.
A Family Arrangement or Family Settlement, which is known in Hindu law and recognised by the courts, can also be executed separately for the purpose of dealing with certain situations. But this ,I shall allude to a little later.
3.Will & business carried on by a partnership: It is normally observed that in cases of a partnership firm having more than 2 partners, there would be a clause in the partnership deed stating that in case of the death of one of the partners, one of his heirs would become a partner in the firm. The reason why a person who is a partner should mention in the will that he or she is a partner , and that as per the relevant clause of the partnership deed an heir can become a partner is that the heirs should be made aware of the same. If however the deed of partnership contains no such clause, then obviously it cannot be mentioned in the will that the testator nominates one of his heirs as a partner. This clause of the will would be rendered redundant in such circumstances. The heirs, however would be entitled to accounts in the above situation as per the relevant provisions of the Partnership Act,1932(section 37)
That brings us to an interesting but important aspect. What would be the position in case of a firm having only 2 partners? If the deed of partnership contains a clause that upon the death of one of the two partners, the heir of the deceased partner enters the firm as a partner, would the firm continue. The answer is in the negative. When a firm has only 2 partners and if one of the dies, even though there may be a clause entitling an heir to step in as a partner, such a clause would be rendered redundant, as upon the death of one of the partners, the partnership no longer exists. This has also been held by the Supreme Court in Commissioner Of Income-Tax, … vs Seth Govindram Sugar Mills Ltd AIR 1966 SC 24 and reiterated in S.P.Misra vs Mohd. Laiquddin Khan (2019) 10) SCC 329.
What then could the partnership anticipate and do in such a situation? The clause as to the heir of a deceased partner being rendered redundant in view of the above, a provision can be perhaps introduced in the deed stipulating that upon the death of one of the partners in a partnership firm having 2 partners, since the firm would cease to exist, a new partnership firm would be formed with the heir or heirs of the deceased partner to ensure continuity of the business. Of course , a new firm would therefore come into existence and all the procedures as per law would have to be carried out. But if this situation is also mentioned in the will of the deceased partner, the heirs would also be made aware of the same in order to carry out the necessary documentation including a new partnership deed which would have to be entered into between the surviving partner and the heir.
Family Arrangement of Family Settlement as a mode of succession planning to a business: Hindu law recognises a Family Arrangement as a valid means of dealing with the issues of disputes within the family. It is normally entered into with a view to avoiding disputes which may happen in future apart from dealing with resolution of current disputes. Depending of course, upon the language it is couched in. This does not rest on any special rule of Hindu law, but flows from general principles and policy of law. It is governed by a special equity peculiar to itself and where the terms are fair, taking into consideration the circumstances of the case, the court makes every effort to recognise and sustain it. A settlement or family arrangement is recognized as a valid transfer of properties under Hindu law. Normally, courts do lean in favour of enforcement of such an arrangement. As is well known, a Hindu Undivided Family may be carrying on a business , and human nature being what it is, disputes may crop up which may have an effect upon the family and the family run enterprise. It is such an eventuality that can be warded off by the peremptory strike of entering into an arrangement not only in order to avoid such future disputes but also can be a very important document when such disputes do occur, and can also be drawn up to resolve them. In fact the decision of the Supreme Court in Sanghi v Western Indian State Motors Ltd (2015 AIR SCW 6542) is testimony to the fact that such a settlement could be accepted, even if it is subsequent to an award or other judicial proceedings, and would prevail even over the award, when there is a finding that it was entered into in order to amicably resolve familial issues. This was a case where the Supreme Court held that the settlement would override the arbitrators award as it was entered into to settle business disputes amicably.
A family arrangement can therefore, also be entered into as an alternative to a Succession plan, in order to deal with various issues which could be the basis of disputes in a family run business.
What happens in the absence of a will or a succession plan: If we examine the issue of intestacy( person dying without a will) or the absence of a succession plan, what will be the situation?
In case of a person belonging to a Hindu Undivided Family or a person belonging to any other religion, in cases of intestacy, the personal law of Succession applicable to the individual will prevail. But more importantly, the person who could have executed the will i.e. the prospective testator has lost the voluntary valid right and opportunity to distribute his estate by a will, to whomsoever he chose to, within the bounds of the law and therefore the consequence being that in the case of an intestate, the law takes over and the distribution therefore takes place as per the law applicable to the deceased. For a will is in the realm of what I term as a private legislation granted by the law to a person to deal with the distribution of his assets.
The intestacy of say, a Hindu will bring into play, the Hindu Succession Act, and his assets including his share in a family enterprise will be governed by that law. This in itself poses problems of another kind. If it is a case of asset distribution to heirs, the issue is not that complicated, as the law takes over, But if the very same person has a share in the family business, and dies intestate, the business may suffer as there would be a reworking as per the law. That is why , especially in case of a family run business, a will or a document dealing with succession assumes significance, as a person can leave behind clarity with regard to his business interests also.
Similarly , in case of a Partnership, if a partner dies intestate, the personal law applicable would prevail and may impact the business interests also. But , normally it is observed that a partnership deed would have a clause as to what would be the status of the partnership in case of death of a partner. Suppose there is a clause stating the manner and method of induction of an heir, it would prevail. This is, in fact akin to a succession plan. If, however there is no clause as to what happens upon death of the partner, his heirs would be entitled to accounts at best. And in case of a partnership firm with only two partners, the firm would obviously stand dissolved as explained above.
Why have a Succession Plan
What makes a family business different from a business set up by professionals is the ‘family involvement’ or ‘family dynamics’. It is therefore very important that in order to see that a family business takes measures to see to it that the succession to the next generation is free from any difficulties and that the transition is smooth. But having said that, it is pertinent to note that in a family run business there is a huge unseen factor of ‘emotional quotient’. In fact this is one of the barriers that has to be taken care of in a succession plan.
In such businesses, the past has shown that the business may not survive the second generation, as a result of the above family dynamics that has been alluded to. The internecine squabbles of the home may often carry over to the business, leading to depletion of the business or even closure. In fact , India is not new to such disputes. Prominent families with well known business interests have suffered just because of the disputes within the family members, leading to the ultimate lessening or even demise of the business. A succession plan is therefore very relevant and necessary.
As I have stated at the beginning, I do not propose to delve into the dynamics of a succession plan, but only to its necessity. Such a document can also take into consideration issues like whether the family wants their own family members working in the business or whether they want to employ professionals to do the job and just be owners with well defined shares for themselves and their heirs and legatees, Leaving the running of the business to professionals as per the wishes and directions of the owners-stakeholders .
Will versus separate Succession Plan: What could be the differences between a Will and a Succession Plan?
A Will , as mentioned earlier can deal with not only bequest of assets to immediate family members , but can also deal with the issue of who should succeed to a family business or part thereof, if it is an HUF business( as the testator can deal with his portion of the property). Of course if he dies intestate, Succession laws would prevail, as mentioned earlier.
A Succession Plan on the other hand, taking into consideration the wishes of all the stake holders of the business, can spell out the manner of succession, the method and the dynamics, including probable areas of responsibility. Something that cannot probably be done in a will, given the nature of the document, as it deals purely with bequests, and passing of property.
Will and Succession Plan: If a will is a document which deals with bequests and legacies, a succession plan document is what can be important for a family run business. While a will can certainly be used to leave a bequest of even a business, it would not be practicable to include all the finer points as to responsibilities and future vision in a will. What then is the way to do it seamlessly? The answer is simple. While the will sets up a bequest or bequests of personal and also business inheritances, a succession document can spell out the finer details and future of the business. Therefore, both can be used in tandem, as stated, thus making the future transition smooth and seamless.
In order to see that the succession document for business is given a semblance of legal structure, all the principals involved should sign the document, thus giving it the legal binding and solemnity that the law requires for its future enforcement, while at the same time, leaving enough room to manoeuvre for future changed circumstances too.
Having said this, the attempt is to see that a person with assets and especially business interests should always think of executing not only a will but also have a succession plan for the same.
This will help in seeing that heirs do not suffer from the same difficulties that may happen in the case of intestacy, leading to long drawn out legal wrangles, while the business and ultimately, the family ends up suffering as a result of lack of planning in the present, by not having a vision for the future.
Sr. Adv. Satyajeet Desai practices at the Gujarat High Court. He is also Revising Author, Mulla’s Hindu Law & S.T Desai on The Law of Partnership.