This article is written by Sarabjit Singh, pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from Lawsikho.com. Here he discusses “What is Vested & Contingent Interest?”.
Transfer of interest flows from the transfer of property, so understanding the latter shall aid us before we proceed further. Transfer of property takes place by an act of parties or by operation of law such as insolvency, forfeiture or sale in execution of a decree. The Transfer of Property Act, 1882 (TPA) relates to transfer by way of sale, exchange, gift, lease or mortgage. The first three convey absolute title, while the last two i.e. lease and mortgage convey limited interest. This transfer is intervivos i.e. between living persons only. Transfer of property also takes place under ‘The Indian Succession Act, 1925’(TISA). It regulates intestate and testamentary succession i.e. when testator a person makes a will before his death for the disposition of his property or when he dies without making a will. A will comes into operation only on the death of the testator.
Transfer of property entails viz. transfer of title, right and interest. Interests are of different kinds Vested, Contingent, Conditional(Precedent and Subsequent), Conditional limitation and Accelerated interests. However, we are confining ourselves only to vested and contingent interests. Dictionary meaning; vested confers or bestows power, authority or property on someone while contingent is subject to chance or occurring or existing only if (certain circumstances) are the case; dependent on.
Sections 19 & 20 of (TPA)directly deal with a vested interest. Under section 19, it is created on registration of transfer deed/instrument of registration. The same specifies the name(s) of the person/company/association in whose favor it is created, along with terms and conditions, and the next important thing is when does it come into effect. There are three possibilities, (a) does not specify the time that it is to take effect, (b) states that it is to take effect forthwith (c) or comes into effect on happening of a specific event that must happen.
Salient features of vested interest: –
- Vested interest creates an immediate right and is not subject to any condition.
- It is both transferrable and heritable right.
- Even if transferee dies before actual possession or enjoyment, it passes on to his heirs.
- Enjoyment can be postponed to a future date.
- Income derived from the property can be accumulated until the time of enjoyment arrives.
- It is not defeated by the death of the transferee before he obtains actual possession.
- Interest is not defeated even if prior interest in the same property is given to some other person.
Similarly, under (TISA) which is applicable to intestate and testamentary succession, vested interest is defined under section 119. Succinctly, stating that vested interest shall accrue on testator’s death to the named legatee. Possession can be postponed depending upon the instructions contained in the will. And if the legatee dies before possession the interest shall pass on to his representative.
When on the transfer of property interest is created for a person not then living, it is a vested interest, and it comes into operation on his birth. Provided there is no prior interest restricting this transfer. Enjoyment of property shall be inferred from the terms of the transfer. And on becoming a major he shall enjoy all rights.
Whereas contingent interest is directly governed by sections 21 – 24 of (TPA). Whereby, on the transfer of property an interest is created that is to take effect only if a specified uncertain event takes place or the specified uncertain event does not take place, such interest shall qualify it to be called contingent interest.
Analogous section 120 of (TISA) explains contingent interest. That a legacy bequeathed shall not come into operation unless specified uncertain event happens, or if the specified uncertain event is not to happen then until it becomes impossible. Such an interest is called contingent interest.
Salient features of Contingent Interest: –
- Contingent interest is acquired on the happening of a specified uncertain event or on it becoming impossible if that is the required contingency.
- If the specified uncertain event does not happen or becomes impossible then contingent interest fails and the property reverts to the transferor.
- Does not create a present right, but a promise of right if the condition of contingency matures, otherwise fails.
- It cannot take effect if the transferee dies before the condition is met.
- It is transferable but not heritable.
- Incapable of descending to heirs.
Therefore, when contingency succeeds depending upon the implied conditions, either on it happening or becomes impossible the contingent interest gets converted to a vested interest, and shall accordingly operate for example w.r.t.right to transfer, inherit, succession etc. However, if the contingency fails then the property reverts to the transferor absolutely, and laws applicable as when it stood in his hands shall come into force. Like vested interest; enjoyment and possession of the property in question shall have no bearing upon the success or failure of contingent interest.
Creation of Contingent Interest
The crux of the contingent interest is ‘specified uncertain event’. So, on the day of creation of this interest, in favor of the ultimate beneficiary, there are a lot of possibilities which the transferor does not know about such as: –
- Actual beneficiary shall come into existence or not.
- Actual beneficiary is born or not.
- If beneficiary shall survive to a particular age or lives to become a major or not.
- When the specified uncertain even will happen.
- Will the beneficiary be surviving at a particular period?
- Time of transferor’s own death etc.
Therefore, to deal with such instances section 13 and 14 of the TPA comes in to play. Namely, section 13 allows the transferor to create interest during his lifetime in favor of the ultimate beneficiary by using an intermediary who holds the precedent interest until the specified uncertain event occurs. Conditions necessary for this to succeed are as follows. For simple understanding let us call the title holder(transferor), intended beneficiary(transferee), and the person holding precedent interest(intermediary).
- Transferor should create interest in favor of the intermediary during his lifetime.
- When contingent interest is created in favor of a person, not in existence. Child in the womb is a person in existence, therefore; for a contingency to succeed minimally intermediary and child in womb both should exist, and the precedent interest has not ceased.
- When contingent interest is passed in favor of persons more than one, subject to them attaining a particular age, it shall operate independently in favor of those of that age and intermediary are alive at the same time, and the precedent interest has not ceased.
- While creating contingent interest, in favor of some specified person, but the transferor does not mention the time of its occurrence. Then the contingency shall fail if the precedent interest ceases in the hands of the intermediary for some reason or he expires before interest is transferred to the specified person.
- Similarly, when transferor does not specify the exact period when contingency interest shall benefit persons surviving unknown period. Interest shall accrue to only those alive at the same time as an intermediary, or before the precedent interest ceases to exist, whichever occurs earlier.
- Lastly, the intermediary cannot transfer the interest to the transferee after he becomes a major when there is no other condition.
Example of Contingent Interest
Let us take the case of, ‘Transfer for benefit of unborn person’ section 13 of (TPA) & section 113 of (TISA), ‘Bequest to a person not in existence at testator’s death subject to prior bequest’. Since coming into existence of a person is an uncertain event; hence the transfer of property in his favor shall constitute contingent interest. As the ultimate beneficiary is not in existence on the day of transfer of property, and section 5 of (TPA) mandates transfer of property only between living persons. Therefore, employing provisions of section 13 / 113transferor / testator during his lifetime creates prior interest in a person living then which could be life interest or less depending upon the construction of the conveyance. Now for this interest to pass on to the person not in existence three conditions have to be met viz. he/she has to come into existence during the lifetime of predecessor holding his interest, the interest passed to ultimate beneficiary should be unfettered i.e. whole of the remaining interest of the transferor / testator in the property, and lastly the conveyance should not contain any clause allowing it to be made voidable or revocable. As narrated earlier limitation with respect to enjoyment or possession of the property shall not defeat the contingency.
In order to understand the concept, important relevant excerpts from case titled N. Radhakrishna Naidu And Ors. vs S. Govindaswami Naidu And Anrare reproduced under: –
“6….Section 113 of the Indian Succession Act deals with the quantum of interest which may be bequeathed in favour of unborn persons. By enacting Section 113 of the Succession Act theLegislature disapproved of any attempt to put limitations upon the estate to be given to persons unborn at the time when the will comes into operation. As observed by their Lordships of the PrivyCouncil in Sopher v. Administrator General, Bengal (1944) 46 Bom.L.R. 865 at 868: 71 I.A. 39 :(1944) 2 M.L.J. 20 (P.C), Section 113 as framed ‘raises or may raise questions of very great difficulty’. The difficulty in the interpretation of the section is caused by the clause ‘the later bequest shall be void unless it comprises the whole of the remaining interest of the testator in the thing bequeathed’. The expression ‘the later bequest’ is obviously used with reference to the bequest in favor of unborn persons. That bequest in order to be valid must comprise the whole of the remaining interest of the testator in the thing bequeathed. The expression ‘remaining interest’ means the entire interest of the testator, less the interest carved out by the prior bequest. In other words, the bequest in favour of unborn persons and the prior bequest between them must exhaust the entire interest of the testator in the thing bequeathed. The section cannot and does not mean that unless the interest bequeathed to an unborn person is in all manner as exhaustive as the interest of the owner of the thing bequeathed, that interest is void. A vested interest granted under a will in favour of an unborn person, possession of which is deferred till the happening of a certain event, is not void by reason of the provisions of Section 113. What that section means is, that where a prior interest is given and a later bequest is provided in favour of an unborn person in the something, the completeness of the estate in favour of the unborn person can be limited only to the extent to which a prior valid bequest can limit it. If there are any other limitations which derogate from the completeness of the estate granted in the thing bequeathed, the bequest in favour of an unborn person is void. If the bequest in favour of an unborn person after a prior valid bequest is dependent upon a contingency, the bequest may also be regarded as void. Similarly, any limitation or a condition of defeasance which derogates from the completeness of the estate in favour of an unborn person so as to reduce it to a life estate, or to an estate defeasible on the happening of a contingency renders such estate void. The expression ‘ remaining interest’ therefore connotes an interest which is as complete as an interest which the testator had in the thing bequeathed such interest not being fettered or limited except by and to the extent of the prior estate; but where a vested interest is given in the thing bequeathed in. favour of an unborn person, the vested interest will not be avoided merely by reason of imposition of limitations which restrict enjoyment.”
“17…. that if under a bequest in the circumstances mentioned in Section 113 there is a possibility of the interest given to a beneficiary being defeated either by a contingency or by a clause of defeasance, the beneficiary under the later bequest does not receive the interest bequeathed in the same unfettered form as that in which the testator held it, and that the bequest to him does not, therefore, comprise the whole of the remaining interest of the testator in the thing bequeathed. That is the conclusion at which their Lordships have arrived on the words of the section read in conjunction with the other sections relating to void gifts”
“22 ….(a) where an interest which is to vest on the birth of a devisee, who at the date of the death of the testator is unborn, is granted, subsequent limitations which merely defer enjoyment are not void by reason of the provisions of Section 113; (b) whereby reason of a contingency the estate devised in favour of an unborn person subject to a previous bequest may not take effect the bequest is void, as it does not comprise the whole of the remaining interest of the testator in the thing bequeathed ; and (c) where an estate which is to vest in an unborn person subject to a prior bequest is made subject to a condition of defeasance, the bequest is void for the same reason.”
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