How debts can resurface after demise and become a headache for heirs

Assets and wealth travel the path of legacy through either testamentary succession or intestate succession.

The stories of Subrata Roy, the founder of the Sahara India Pariwar group, and R Subramanian, the founder of retail chain Subhiksha who was sentenced by a special court last month to a 20-year prison term, share a few commonalities: a finance entity used in ‘duping’ retail investors, a large workforce, and a pan-India presence.

In 1978, Roy, with a diploma in mechanical engineering, started with a modest business. By the mid-2000s, the Sahara group faced the heat of regulators. On August 31, 2012, the Supreme Court upheld the market regulator’s directions asking two of its entities to refund investors’ money of about Rs 12,000 crore with interest.

In 1991, Subramanian, an Indian Institute of Technology gold medallist and a graduate of the Indian Institute of Management Ahmedabad, promoted Viswapriya India, a financial services company, and by 1997, he established Subhiksha, a retail chain with over 1,500 outlets. Subramanian confessed to defaulting on over Rs 137 crore to depositors of Viswapriya.

The Securities and Exchange Board of India ordered B Ramalinga Raju, former chairman of Satyam Computer Services, and others on November 30 to pay back Rs 624 crore of unlawful gains made from the sale of shares along with interest of Rs 1,100 crore (@ 12 percent) aggregating Rs 1,700 crore (if paid by early 2024).

Roy passed away on November 14 and his case now turns to how his heirs will be affected by the group’s liabilities.

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Challenge to legacy

Assets and wealth travel the path of legacy through either testamentary succession or intestate succession.

A testamentary document – a will or trust deed – includes, apart from assets (loans and advances), liabilities contracted on the date of signing the will or trust deed. These would include the outstanding liabilities and loans and advances on the date of demise of the testator, or the person making the will.

The executors of the will (on the date of demise) have the fiduciary responsibility to record, access, quantify and confirm the monetary value of the liabilities and advances to determine the amounts to be paid to or recovered from the estate of the deceased.

In the course of business, entrepreneurs, businessmen, professional managers and authorised signatories typically contract debt, loans and advances for business purposes. If recorded as an entity liability, then on their demise, it does not impact their personal estate, wealth and assets.

However, if a testator has assets with ongoing litigation or disputes, or in the case of disputed demands raised by tax or statutory authorities that may be undergoing court proceedings, it is the responsibility of the executor to include and provide for adequate monetary value to be kept aside from the estate.

Further, the executor is barred from distributing the assets bequeathed to the designated beneficiaries if there is an attachment order issued by a competent judicial authority on the assets. Such attachment orders state the maintenance of status quo, which could include freezing movable (financial) assets as well.

Economic offences including cases booked under the Prevention of Money Laundering Act, 2002, involving high-ranking officials/professionals and others have, in most cases, impacted the fate of personal assets from being bequeathed on the demise of the individual implicated.

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Nasty surprises

Here are a couple of instances of problems faced by heirs.

Arjun Tambe retired and settled in his Delhi Development Authority (DDA) flat in Delhi with his wife, daughter Sangita (a divorcee) and his grandchild Suruchee. Tambe’s perpetual concern was the future of his daughter and grandchild after his demise.

He borrowed money initially from the neighbours and then from his former colleagues. At one point, his former colleagues sought his original house papers as security against their loan. His death shattered the entire family. With the decrease in the pension amount, the family had to sell the flat to survive.

To sell the flat, it had to first be transferred to the names of the family members, which involved a legal process attracting court fees, documentation and legal expenses. Without a will in place, the retrieval of assets proved to be a challenge and a costly proposition. The proceeds from the sale of the flat helped settle the outstanding loans and with the residual amount, the family relocated to Mathura to sustain their future.

Dinesh Lalwani and Pritam Mansukhani were partners in Lajawab Perfumes and their spouses ran La Bela Hostels, a 30-bed facility for bachelors, in Bhubaneshwar.

Mansukhani died in a road accident and his wife slipped into a semi-coma. As per Mansukhani’s will, he had bequeathed all his wealth to his wife. However, her semi-comatose state made implementation of the will a challenge.

Daisy Lalwani ran La Bela Hostels and this helped to pay the steep medical bills of Jolly Mansukhani, Pritam’s wife. However, recovering the loans and advances given to Mansukhani’s relatives (against inadequate documentation) was difficult. Creditors also flocked to La Bela Hostels, seeking payments against their supplies.

Legal recourse helped Daisy establish the genuineness of the claims, draft a conducive repayment schedule, and initiate action to recover the funds, which was unusually tough, essentially because documentation evidence was lacking.

With Jolly being incapacitated and unable to contract, the asset transmission needed court intervention through filing of a petition to access Mansukhani’s financial assets only to settle mounting medical expenses of Jolly, the sole beneficiary and heir.

Beneficiaries under a Testamentary document or heirs as per Succession laws will be responsible only to the extent of the value of the asset inherited. They are liable for debts (of their deceased Testator) contracted by the Testator personally and established as genuine debts to the satisfaction of the executor.

(Names of individuals mentioned have been changed for purposes of confidentiality)