Lawful Purpose of Trusts (Section 4 of the Trusts Act):
A trust can only be created for a lawful purpose. A trust is deemed lawful unless:
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It is forbidden by law.
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It would conquer the provisions of any law if permitted.
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It is fraudulent.
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It involves or implies injury to another person or their property.
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It is examined as immoral or against public policy by the court.
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If a trust's purpose is unlawful, the trust is void.
Fraudulent Transfers and Voidability (Section 53 of the Transfer of Property Act):
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If the transfer of immovable property is intended to defraud creditors, such a transfer is voidable at the creditor's option under Section 53 of the Transfer of Property(TP) Act.
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If a property settlement within a trust falls under this provision, the trust could be set aside as void under Section 4 of the Trusts Act.
Insolvency and Trusts:
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Under the Provincial Insolvency Act and the Presidency Towns Insolvency Act, any voluntary transfer of assets within two years prior to insolvency is voidable at the request of the official receiver or assignee.
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The Sindh High Court ruled that a trust created at the time of the settlor's insolvency is unlawful if it goes against the official assignee.
Supreme Court Ruling in Chogmal Bhandari v. Dy Commercial Tax Officer:
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The Supreme Court addressed whether a trust created by a debtor to benefit creditors, with an order of preference for payment, would be unlawful under Section 4 of the Trusts Act.
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The Court held that establishing an order of preference for paying creditors does not automatically imply an intent to defraud. As such, a trust with this arrangement is valid.
Also Read: What legal constraints should be taken into consideration when transferring assets to a trust?