Your Non-Profit Might Be a 'Trust' in Disguise: 4 Surprising Truths from a Landmark Supreme Court Ruling

 

Introduction: The Trust We Place in Charities

When the public donates to a charitable society or a non-profit organization, there is an implicit trust that the funds will be used for the stated noble cause. We assume that the people running these organizations are bound by a duty to serve the public interest, not their own. But what happens when serious allegations of financial mismanagement and siphoning of funds arise within a charitable society, which is legally structured differently from a formal trust?

This was the central question before the Supreme Court in the landmark case of Operation Asha v. Shelly Batra. The ruling grappled with a complex legal puzzle: How can the law hold the leadership of a non-profit society accountable in the same way it holds the trustees of a public trust? The Court’s decision offers a powerful clarification on the duties of those who manage public charitable funds, regardless of the organization's legal label.

This article distills the four most surprising and impactful takeaways from this ruling, explaining how the judiciary can impose trust-like duties on non-profits to ensure that public purpose is always placed above personal gain.

1. A Non-Profit 'Society' Isn't a Person (and Can't Own Property)

One of the most counter-intuitive facts at the heart of this case is a basic principle of Indian law: a society registered under the Societies Registration Act, 1860, is not a "juristic person" or a "body corporate" in the same way a company is. This has a profound and direct consequence: the society itself cannot legally own property. So where do the assets go? The law provides a clear answer to prevent a legal vacuum.

According to Section 5 of the Societies Registration Act, 1860, any property "belonging to the society" is legally vested in its governing body (such as its Executive Committee) or in separately appointed trustees. This vesting comes with an inescapable fiduciary duty to use the assets solely for the society's charitable mission. The governing body has no personal beneficial interest in the property. In fact, upon the dissolution of a society, its assets cannot be distributed to members but must be transferred to another society with similar objectives. This legal structure places the responsibility for the organization's assets squarely on the shoulders of the individuals in charge, reinforcing their role as stewards, not owners.

"What follows from a conspectus of the aforesaid decisions discussing Section 5 of the Societies Registration Act, 1860 and the vesting of property in the governing body of the society is that, a society registered under the aforesaid Act is not a juristic person or a body corporate capable of holding property by itself. It is for this reason that a fictional vesting of the ‘property belonging to the society’ has been made in favour of the governing body of the society."

2. The Legal Fix: Imposing a 'Constructive Trust'

This concept is the core of the Supreme Court's analysis. Even if a charitable society was not created as an "express trust" through a formal legal document, the law has an equitable tool to ensure accountability: the "constructive trust."

A constructive trust is a legal remedy created by a court, regardless of anyone's original intention, to prevent a person holding title to property from being "unjustly enriched." Crucially, the Court's approach is not just to invent a trust as a convenient fix; it recognizes a trust that arises automatically by law (the 'institutional' model) because of the governing body's inherent fiduciary role. A breach of this fundamental duty is the trigger. The Court notes that a constructive trust arises "the very moment any fiduciary removes or diverts the property." When members of the governing body allegedly siphon funds for personal benefit, they become "constructive trustees" of that specific misused property, which legally belongs to the public cause it was intended for.

To make this abstract concept concrete, the Supreme Court provided a "tentative list" of criteria a court can examine to determine if a society may be considered a constructive trust. This checklist includes:

• The intention behind property grants: Was the property for the benefit of the organization or for personal gain?
• Obligations on the grant: Was the grant accompanied by any conditions, express or implied, on its use?
• Completeness of dedication: Did the original owner completely relinquish ownership of the property for the charitable object?
• Public user rights: Can the public or an unascertained class of people exercise any right over the organization and its properties?
• Use of profits: Are profits used to benefit the organization and its objectives?

"A constructive trust, arises by operation of law, without regard to or irrespective of the intention of the parties to create a trust. It is imposed predominantly because the person(s) holding the title to the property would profit by a wrong or would be unjustly enriched if they were permitted to keep the property."

3. A Law Designed to Protect Charities From Harassment

Perhaps the most surprising takeaway is that the very law used to sue public trusts for mismanagement—Section 92 of the Civil Procedure Code (CPC)—was primarily designed to protect them. The Supreme Court highlighted that the main object of Section 92 is to shield public trusts and charities from being harassed by "frivolous and mischievous" lawsuits.

The law contains a critical safeguard: before anyone can file a suit under Section 92, they must first obtain "leave of the Court." This requirement acts as a vital filter. A judge must first be convinced that there is a legitimate, good-faith case concerning the public interest before allowing the lawsuit to proceed. This protection is necessary to prevent charitable funds from being "wasted on litigation" and to avoid dissuading "respectable and honest people from becoming trustees." This mechanism ensures that only serious allegations of mismanagement that affect the public are brought before the court, preventing the charity's mission from being derailed by baseless legal challenges.

"The object of Section 92 CPC is to protect the public trust of a charitable and religious nature from being subjected to harassment by suits filed against them... If the persons in management of the trusts are subjected to multiplicity of legal proceedings, funds which are to be used for charitable or religious purposes would be wasted on litigation."

4. Courts Can Separate Public Interest from Personal Fights

The lawsuit in the Operation Asha case was complex, involving a mix of very different allegations. On one hand, there were serious claims of financial siphoning and misuse of charitable funds—a matter of clear public interest. On the other hand, the suit also included personal grievances, such as the wrongful dismissal of a co-founder from her position.

The Supreme Court took a pragmatic and insightful approach. It ruled that the mere presence of personal grievances does not automatically disqualify a suit brought under Section 92. Instead, the court must look at the "dominant purpose of the suit." If the main goal is to protect the public's interest in the charity and ensure its funds are used properly, the suit can proceed, even if the plaintiffs also have personal scores to settle.

Crucially, the court has the power to surgically address only the parts of the lawsuit that relate to public accountability. It can grant public reliefs like "directing accounts and inquiries" or "settling a scheme" for new management, while completely ignoring the prayers related to personal rights. Those private grievances, such as the prayer for "reinstatement" of the co-founder, must be pursued in a separate, regular lawsuit, not in a special suit meant to protect the public interest.

Conclusion: A New Standard for Accountability?

The Supreme Court's ruling in Operation Asha v. Shelly Batra sends a clear message. While charitable societies and formal trusts are distinct legal entities, the judiciary will not allow this distinction to become a loophole for mismanagement. The Court has affirmed its power to use powerful equitable tools, most notably the "constructive trust," to ensure that individuals managing public charitable funds are held to the highest fiduciary standards.

This decision reinforces the principle that the duty to act in the public interest is paramount, transcending the specific legal form an organization takes. As the line between non-profits, social enterprises, and traditional charities continues to blur, does this ruling set a vital precedent for ensuring that public purpose is always placed above personal gain?