Charity Commissioner Permission for Encumbering Trust Property

Vikrant D. Shetty

Aug 23

9 min read

Updated: Aug 26

Mortgaging or otherwise encumbering trust property requires the previous sanction of the Charity Commissioner under Section 36A of the Maharashtra Public Trusts Act, 1950, a distinct and often stricter requirement than the sanction needed for an outright sale under Section 36. Borrowing creates a continuing liability that outlasts the transaction itself and can affect the trust's finances for years. This article explains how Section 36A sanction for encumbering trust property works, and where it differs from the sanction process for a sale.

Why Encumbrance Is Treated as a Distinct Category

Borrowing Is a Continuing Liability, Not a One-Time Transaction

A sale of trust property, once completed and sanctioned, closes the transaction. A mortgage or other borrowing against trust property instead creates an ongoing obligation, repayment with interest over a period of time, secured against an asset the trust may still need for its charitable activities, which is why the Maharashtra Public Trusts Act, 1950 (the "MPT Act") treats borrowing as requiring its own specific sanction under Section 36A, separate from the sanction required for a sale, exchange, or gift under Section 36.

What Does Section 36A Actually Cover?

Section 36A provides that no trustee shall borrow money, whether by way of mortgage or otherwise, for the purpose of or on behalf of the trust except with the previous sanction of the Charity Commissioner. The provision is deliberately broad in how it defines borrowing, covering not just a formal mortgage deed but any arrangement under which the trust takes on a financial obligation secured against, or otherwise connected to, its property.

What the Charity Commissioner Considers Before Granting Sanction

The Genuine Need for the Loan

As with a sanction application for sale under Section 36, the Charity Commissioner's central enquiry is whether the trust has a genuine need to borrow, for instance to fund an urgent repair, complete a construction project central to the trust's charitable activities, or bridge a temporary shortfall, rather than to finance a speculative or unrelated venture that happens to be convenient for the current trustees.

The Terms of the Proposed Borrowing

The Commissioner also examines whether the interest rate, repayment schedule, and security terms offered are reasonable and protective of the trust's interests, since a loan on unfavourable terms can quietly erode trust assets over its term even where the underlying purpose for borrowing was entirely legitimate. Trustees proposing to borrow from a related party or an entity connected to one of the trustees themselves should expect this aspect of the enquiry to receive particularly close scrutiny.

The Trust's Capacity to Service the Debt

An application for sanction should realistically address how the trust intends to repay the loan from its regular income or other resources, since a trust that borrows without a credible repayment plan risks eventual default, which could in turn force a sale of the very property offered as security, defeating the purpose the borrowing was meant to serve.

Feature	Section 36 (Sale, Exchange, Gift, Lease)	Section 36A (Borrowing/Mortgage)
Nature of the transaction	One-time disposal of trust property	Ongoing liability secured against trust property
Core enquiry	Genuine need to dispose, and best available terms	Genuine need to borrow, and reasonable loan terms
Continuing obligation after sanction	None; transaction is complete	Repayment obligation continues for the loan term
Risk if terms are unfavourable	One-time loss on the transaction	Compounding loss through interest over time

Ex-Post Facto Sanction: A Narrow Exception

The General Rule Requires Prior Sanction

As with Section 36, the ordinary rule under Section 36A is that sanction must be obtained before the trust borrows money, not afterward. Trustees who borrow first and seek sanction later expose the transaction, and potentially themselves personally, to being treated as having acted without authority.

The Limited Ex-Post Facto Exception

Amendments to the MPT Act have introduced a narrow ex-post facto sanction mechanism, permitting the Charity Commissioner to grant sanction after the fact where the trust has borrowed from a nationalised or scheduled bank in exceptional and extraordinary circumstances, and where the absence of prior sanction would otherwise cause hardship to the trust, a beneficiary, or a bona fide third party. This exception is deliberately narrow: it is not available for borrowing from private lenders or informal sources, and trustees should not treat it as a routine substitute for obtaining sanction in advance.

Why the Exception Should Not Be Relied Upon as a Planning Strategy

Trustees sometimes assume that because an ex-post facto route exists in principle, prior sanction can be treated as a formality to be regularised later if convenient. This is a risky assumption: the exception applies only in the specific circumstances the amendment describes, and a trust that borrows without prior sanction outside those circumstances has no guarantee that after-the-fact regularisation will be available at all.

Consequences of Borrowing Without Proper Sanction

The Transaction's Validity

Borrowing undertaken without the Charity Commissioner's sanction, where no ex-post facto exception applies, is vulnerable to being treated as unauthorised, exposing the trust and the lender to significant uncertainty about the enforceability of the security created, and potentially leaving the trust in the position of having received funds without a valid legal obligation to repay on the terms initially agreed.

Personal Liability of the Trustees Involved

Trustees who enter into unsanctioned borrowing arrangements can face personal liability for any loss the trust suffers as a result, independent of whatever recourse the lender may have. This is a materially different, and often more direct, exposure than the risk trustees face in an unsanctioned sale, since a failed borrowing arrangement can leave the trust with both an invalidated transaction and an unresolved financial shortfall.

Grounds for Regulatory Action Against the Responsible Trustees

Unsanctioned borrowing can also form the basis of a Section 41D application seeking the removal of the trustees responsible, particularly where the borrowing formed part of a broader pattern of financial mismanagement rather than an isolated, good-faith procedural lapse.

Distinguishing Encumbrance From an Outright Alienation

Why Are Mortgage and Sale Sanctions Sometimes Confused?

Trustees occasionally treat a mortgage as a lesser transaction than a sale, reasoning that the trust retains ownership of the property throughout, and therefore assume the sanction requirements are correspondingly relaxed. In practice, the Charity Commissioner's scrutiny of a proposed mortgage can be just as rigorous as scrutiny of a proposed sale, precisely because a mortgage places the trust's core asset at risk of forced sale in the event of default.

When a Transaction Involves Both Elements

Some transactions combine features of both categories, for instance where trust property is mortgaged as security for a loan that is itself intended to fund improvements before an eventual sale. In these situations, trustees should identify each element of the transaction that requires separate sanction, rather than assuming that sanction obtained for one aspect automatically covers the other.

Documentation the Charity Commissioner Typically Expects

The Trust's Recent Financial Statements

An application for sanction to borrow is generally expected to be accompanied by the trust's recent balance sheet and income and expenditure account, since the Commissioner's office will want to assess the trust's existing financial position before evaluating whether the proposed borrowing is sustainable alongside the trust's other obligations.

A Resolution of the Trustees Authorising the Borrowing

The application should be supported by a proper resolution of the board of trustees specifically authorising the borrowing, identifying the amount, the purpose, the proposed lender, and the property or asset offered as security, rather than a general or open-ended authorisation that leaves these material details to be filled in later.

Draft Terms of the Proposed Loan or Mortgage Deed

Where the lender has already been identified, providing the draft terms of the loan agreement or mortgage deed allows the Charity Commissioner's office to assess the actual interest rate, tenure, and security arrangements being proposed, rather than evaluating the application in the abstract before the concrete terms have even been settled.

Practical Steps Before Applying for Sanction

Preparing a Clear Financial Justification

An application is considerably more likely to succeed where it is supported by a clear account of why the trust needs to borrow, how the funds will be used, and how repayment will be funded, presented in a manner the Charity Commissioner's office can readily verify against the trust's existing accounts.

Comparing Available Lending Terms

Just as a sale application benefits from evidence that the trust obtained the best available terms, a borrowing application is strengthened by evidence that the trustees compared terms from more than one potential lender, rather than accepting the first offer presented, particularly where the proposed lender has any existing connection to a trustee.

Frequently Asked Questions

Does every loan taken by a public trust require Charity Commissioner sanction?

Yes, where the loan is secured by way of mortgage or otherwise connected to the trust's property or funds, Section 36A requires prior sanction regardless of the loan amount, though the practical scrutiny applied may vary with the scale of the transaction.

Can a trust obtain sanction after already taking the loan?

Only in narrow, exceptional circumstances involving borrowing from a nationalised or scheduled bank where the absence of prior sanction would cause genuine hardship. This ex-post facto route is not available for private lenders and should not be treated as a routine fallback.

What happens if a trust mortgages its property without sanction?

The transaction is vulnerable to being treated as unauthorised, which can affect the enforceability of the security created, and the trustees responsible can face personal liability and potential removal proceedings for the resulting harm to the trust.

Is a mortgage treated more leniently than a sale because the trust retains ownership?

No. The Charity Commissioner's scrutiny of a proposed mortgage is generally just as rigorous as scrutiny of a sale, since a mortgage places the trust's property at risk of forced sale if the loan is not repaid.

Can trustees borrow from a bank connected to one of the trustees themselves?

This is possible in principle, but such arrangements attract closer scrutiny of the loan terms to confirm they are genuinely favourable to the trust and not influenced by the trustee's personal connection to the lender.

What should a trust do if it urgently needs funds before sanction can be obtained?

Wherever possible, the trust should still apply for sanction and explain the urgency to the Charity Commissioner's office rather than borrowing first, since proceeding without sanction outside the narrow statutory exception creates significant legal risk regardless of how pressing the underlying need was.

Does obtaining sanction for a mortgage also authorise a subsequent sale of the same property?

No. Sanction is transaction-specific, and a later sale of the mortgaged property, whether to repay the loan or for any other reason, requires its own separate sanction under Section 36.

Does Section 36A apply to informal borrowing arrangements that are not a registered mortgage?

Yes. Section 36A is drafted broadly to cover borrowing by way of mortgage or otherwise, so any arrangement under which the trust takes on a financial obligation secured against or connected to its property requires prior sanction, regardless of whether it takes the form of a formal registered mortgage deed.

What financial information should accompany a Section 36A sanction application?

Applications are generally expected to include the trust's recent balance sheet and income and expenditure account, a trustee resolution specifying the amount, purpose, lender, and security offered, and, where available, the draft terms of the proposed loan or mortgage deed, so the Charity Commissioner can assess the trust's capacity to service the debt.

Can a public trust mortgage its property as security for someone else's loan?

Section 36A of the Maharashtra Public Trusts Act, 1950 permits borrowing for the purpose of or on behalf of the trust. Offering trust property as security for a third party's debt does not meet that description, because the trust carries the risk without receiving the benefit. Such an arrangement is ordinarily outside the trustees' authority even if sanction were sought, and trustees who provide security for an outsider's borrowing expose themselves to personal liability for any resulting loss and to removal proceedings under Section 41D.

Does refinancing a sanctioned loan require fresh sanction under Section 36A?

Yes. A refinancing replaces one borrowing with another, on new terms and often with a different lender and a fresh security document. Section 36A attaches to the act of borrowing rather than to the property, so sanction granted for the original loan does not carry across to its replacement. Trustees should apply afresh, setting out the new interest rate, tenure and security, and explaining why the refinancing improves the trust's position. Treating the earlier sanction as continuing cover is a common and costly assumption.

Can the Charity Commissioner attach conditions to a Section 36A sanction?

Yes. Sanction under Section 36A is discretionary, and it is routinely granted subject to conditions: a ceiling on the amount borrowed, a maximum rate of interest, a requirement that the loan be drawn only from a nationalised or scheduled bank, or a direction that the proceeds be applied solely to the stated purpose. Borrowing on terms materially different from those sanctioned can leave the trust in much the same position as if no sanction had been obtained at all.

Does an overdraft or cash credit facility count as borrowing under Section 36A?

Section 36A covers borrowing whether by way of mortgage or otherwise, and that wording is deliberately wide. An overdraft, a cash credit line, or any facility under which the trust draws funds it must repay creates a financial obligation of the trust and falls within the section, even where no mortgage deed is executed and no specific property is charged. Trustees arranging such facilities should not assume that the absence of a registered mortgage places the arrangement outside the provision.