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The Official Assignee of Madras Vs. T. Krishnaji Bhat, Minor by His Father and Guardian, T. Sivasankara Bhat - Court Judgment

LegalCrystal Citation
SubjectTrusts and Societies
CourtChennai
Decided On
Reported inAIR1930Mad693; (1930)59MLJ718
AppellantThe Official Assignee of Madras
RespondentT. Krishnaji Bhat, Minor by His Father and Guardian, T. Sivasankara Bhat
Cases ReferredOfficial Assignee of Madras v. Devakottah Nagarathar Sri Minakshi Vidyasala Paripalana Sangam
Excerpt:
- - srinivasa aiyangar contended, by the stock-in-trade, the good-will of the business and the outstanding debts due to the business--in short by the assets of the firm. krishnaswami aiyar has raised several interesting and ingenious objections why this principle is not applicable to the present case. we must remember that this is a very exceptional trust, in which the creator of the trust authorised the trustees to use the money, to invest the money, in their own business. as is well known, if the subject of a trust is a house, the trustee cannot take a lease of that house for himself. 10,000. no doubt it is a well-established principle that a trustee is to make no profit out of the trust fund, the reason for the rule being as stated in lewin on trusts, 13th ed......alleged and certainly no breach of trust was made out.8. on that basis no wrongful disposal of the trust property has been shown; nor has any wrongful mixing of the trust property with other property of tawker & sons, such as would bring the case within section 66 of the indian trusts act, been suggested. that being so, can the plaintiff get a charge for this rs. 10,000 on tawker & sons' assets? he can do so, if he can trace his trust property into the assets in the official assignee's hands within the meaning of section 63 of the trusts act. it is admitted that the official assignee got into his hands a considerable quantity of jewellery, the stock-in-trade of tawker & sons, after their adjudication and that by selling a part of that stock he has realised rs. 22,000, much more than is.....
Judgment:

Reilly, J.

1. In this case it is admitted that in August, 1919, Tawker & Sons, defendants 1 to 8, who were a firm of jewellers, collected Rs. 65,000 on behalf of the plaintiff's father, who is a nephew of defendant 1. It is also admitted that in October, 1919, the plaintiff's father created a trust in respect of Rs. 10,000 out of that Rs. 65,000. The trustees were Tawker & Sons, defendants 1 to 8, and the beneficiary was the plaintiff, who was then a minor, aged 13. The obligations of the trust are set out in Ex. A, a letter from the plaintiff's father to defendant 1, in which he says:

It is my request that you should invest in your firm Rs. 10,000 in the name of my minor son, T.S. Krishnaji Bhat, and pay him the interest accruing thereon ;

and after making reference to another matter he goes on,

I shall not trouble you any more about these moneys and shall not question your investment of Rs. 10,000 either in your firm or any other as you may deem fit from time to time as you may deem proper. Until my said son becomes 21 years of age, you need not hand over the principal to him, only the interest you can be paying to my family.

2. A few days later Tawker & Sons gave a receipt to the plaintiff's father for this Rs. 10,000 as fixed deposit in the name of his minor son T. Krishnaji Bhat in accordance with the instructions contained in Ex. A, stating that the amount was to carry interest at 9 per cent, per annum.

3. In November, 1923, that is, four years later, the plaintiff instituted this suit against Tawker & Sons, alleging that they were then involved in financial difficulties and were likely to be adjudged insolvents and also that they had committed a breach of trust by not investing the Rs. 10,000 in accordance with the trust. He claimed a preferential right over the assets of Tawker & Sons to the extent of Rs. 10,000 and any interest that might be due upon it, and he prayed for the removal oft Tawker & Sons from their office of trustees, for the appointment of a new trustee and for an order that Tawker & Sons should hand over the Rs. 10,000 to the new trustee or that it should be paid into Court out of their assets in preference to the claims of any other creditors.

4. Tawker & Sons in their written statement admitted the trust. They denied that the plaintiff had any right to question their investment of the Rs. 10,000; they denied that they had committed any breach of trust; they alleged that there had been over-payment of interest; and they maintained that the suit was premature.

5. Issues in the suit were framed in July, 1924. It must be noticed that at that stage the allegation of breach of trust was dropped, and there is nothing at all about it in the issues. At some time in 1925, while the suit was pending, Tawker & Sons were adjudged insolvents. The Official Assignee was then brought in as defendant 9, and in February, 1926, he filed a written statement, in which he put the plaintiff to the proof of the trust and denied that the plaintiff had any preferential claim over the assets of Tawker & Sons. But he did not ask for any additional issue to be framed.

6. At the trial the existence of the trust was admitted, though it is not clear exactly what admission was made in regard to the subject-matter of the trust. Kumaraswami Sastri, J., who tried the case, has made a statement in his judgment in regard to the course the arguments took, which Mr. Venkatarama Aiyar, who appeared for the Official Assignee at the trial and also appears in the appeal, has told us is not exactly correct. But there is no question now that the existence of some trust was not then denied by the Official Assignee, though, as will be seen, there is still some dispute as to what was the subject-matter of the trust. The main question which was dealt with at the trial was the question whether the plaintiff had a preferential claim over the assets of Tawker & Sons. Kumaraswami Sastri, J., came to the conclusion that the plaintiff had such a claim, and he made a decree against the Official Assignee for the payment of the Rs. 10,000 and interest into Court. He did not order the removal of Tawker & Sons as trustees, nor did he say anything about the appointment of a new trustee. But that is of no importance at the present moment, as we are informed that the plaintiff is already a major, more than 21 years of age. The Official Assignee appeals against that decree.

7. As I have said, at the trial the allegation of breach of trust was not urged. It had been dropped, so far as we can see, at a much earlier stage. But at a very late stage in the arguments before us it has been suggested that the breach of trust may be made out in this way. Tawker & Sons as trustees were under the duty of guarding the interests of the plaintiff in the most diligent way possible; they had the option of investing this money either in their own firm or in any other firm : when they found that their own firm was in difficulties it was their duty to exercise 'their option of putting the money in some safer business. But that contention was not raised at the trial; and there is no evidence on the record to show when Tawker & Sons began to be in financial difficulties, or how far those difficulties had gone at the date of the suit. In my opinion we cannot take up this question of breach of trust at this stage. We must treat the case, as it was treated at the trial, as one in which no breach of trust was seriously alleged and certainly no breach of trust was made out.

8. On that basis no wrongful disposal of the trust property has been shown; nor has any wrongful mixing of the trust property with other property of Tawker & Sons, such as would bring the case within Section 66 of the Indian Trusts Act, been suggested. That being so, can the plaintiff get a charge for this Rs. 10,000 on Tawker & Sons' assets? He can do so, if he can trace his trust property into the assets in the Official Assignee's hands within the meaning of Section 63 of the Trusts Act. It is admitted that the Official Assignee got into his hands a considerable quantity of jewellery, the stock-in-trade of Tawker & Sons, after their adjudication and that by selling a part of that stock he has realised Rs. 22,000, much more than is necessary to satisfy the plaintiff's claim. At the trial an attempt was made to trace the Rs. 10,000 with which we are concerned definitely to the jewellery which came into the Official Assignee's hands about six years after the creation of the trust. That obviously was a very difficult thing to do. It would require a chain of definite evidence to show that the jewellery which came into the Official Assignee's hands was actually bought with this Rs. 10,000 or with the proceeds of other jewellery, which in its turn was connected directly or indirectly by some chain of happenings with the Rs. 10,000. So far as the record shows, no attempt whatever was made to show anything more than the first step in such a chain, namely, that the Rs. 10,000 was used by Tawker & Sons for the purchase of some jewellery. What became of that jewellery, except that the evidence indicates that' it was probably sold and the proceeds used again, there is nothing to show. And even in regard to this first purchase with the Rs. 10,000 the evidence, which is that of the plaintiff's father, appears to me vague, inadequate, flimsy and entirely insufficient to trace the Rs. 10,000 to the jewellery which actually came into the Official Assignee's hands. But it has been urged before us by Mr. Srinivasa Aiyangar, who appears for the plaintiff, that it is not necessary for him to show that this Rs. 10,000 became by a succession of happenings transformed into that' particular jewellery which eventually came into the Official Assignee's hands, that it is enough for him to show that the Rs. 10,000 was invested in Tawker & Sons' business, which is admitted, and that from that alone he can trace the trust property to the assets of the firm, at the time of their insolvency. Is that admitted fact, the investment of the Rs. 10,000 in Tawker & Sons' business, sufficient for this purpose of tracing within the meaning of Section 63 of the Trusts Act? We must remember that this investment was permitted, and, indeed, intended, by the plaintiff's father when he created the trust. When he directed that the Rs. 10,000 was to be invested in Tawker & Sons' business, should they wish so to invest it, what could he have meant except that it was to become a part of the working capital of Tawker & Sons' business? If that were so, into what could it become transformed when used as working capital? It would be spent, we may suppose, on the purchase of stock or the payment of establishment or other running charges of the business or perhaps in clearing off debts and overdrafts. If that was done, what would represent the trust property now? I think it would be represented, as Mr. Srinivasa Aiyangar contended, by the stock-in-trade, the good-will of the business and the outstanding debts due to the business--in short by the assets of the firm.

9. Mr. Krishnaswami Aiyar, for the Official Assignee, has urged strongly before us that, if you are to trace and follow trust property within the meaning of Section 63 of the Trusts Act, you must be sure that there is a continuing identity from one transformation to another, there must be a traceable continuity. That is undoubtedly correct. You must be able to assure yourself with reasonable certainty that the trust property has been transformed by successive transactions into the substitute which the beneficiary claims or into something embracing it on which he is entitled to a charge. It does seem at first sight a rather long step to say that trust property invested in a business can by that fact be traced within the meaning of the section to the eventual assets of the business. But in Pennell v. Deffell (1853) 4 De G.M. & G. 372 : 43 E.R. 51 Turner, L.J., gave an instance of following trust property in this sense. His illustration was the case of an executor of a deceased partner leaving the deceased partner's capital with the surviving partners for them to trade with; and he pointed out that that would be trust money in the hands of the surviving partners and it might be followed, even though it started in the first instance when entrusted to them in the comparatively vague form of stock-in-trade and book debts, through all the fluctuations and ramifications of the business for a long period to its ultimate fruits, to which the beneficiaries would be entitled. That carries this principle of tracing or following trust property very far. Are we asked to go any further in this case? Mr. Krishnaswami Aiyar has suggested that the illustration put by Turner, L.J., is inapplicable to this case because the deceased partner had an interest in every item of the partnership assets, and he would distinguish the ease put in the illustration from this case in that matter. But surely Turner, L.J., was not dealing with that aspect of the matter at all. If he had been, his illustration would have been entirely inapplicable to the case he was then discussing Pennell v. Deffell (1853) 4 De G.M. & G. 372 : 43 E R. 551. He was stating generally the length to which the tracing of property was carried in Courts of Equity ; and in my opinion that principle as illustrated by him on that occasion is sufficient to cover the tracing of the Rs. 10,000 originally invested in Tawker & Sons' business to the assets remaining in that business when they were adjudged insolvents. It makes no difference that their assets represented not only the Rs. 10,000 but something else also. That does not affect the question, as is shown by the second illustration to Section 63 of the Trusts Act.

10. But Mr. Krishnaswami Aiyar has raised several interesting and ingenious objections why this principle is not applicable to the present case. He has pointed out quite rightly that, when you are tracing trust property through a chain of transformations, if you reach a stage where the relationship of trustee and beneficiary no longer exists and in its place you find only the relationship of debtor and creditor, the chain breaks and tracing can go no farther. That is quite true. He urges that in this case the chain broke at the very outset, his contention being that, when the Rs. 10,000 was invested in Tawker & Sons' business, the relationship of debtor and creditor arose and superseded that of trustee and beneficiary. But I do not think that that correctly represents the position. Can we say in the words of Thesiger, L.J., in In re Hallett's Estate (1880) L.R. 13 Ch. D. 696 that nothing remained 'beyond the ordinary duty of a man to pay his debts'? What difference except in one respect, can we find between the relationship of Tawker & Sons to the plaintiff in regard to the Rs. 10,000 and the relationship of the surviving partners to the executor of the deceased partner in the illustration put by Turner, L.J., in Pennell v. Deffell (1853) 4 De G.M. & G. 372 : 43 E R. 551. There is one distinction. I have mentioned that Tawker & Sons were to pay to the plaintiff interest at 9 per cent, per annum on the Rs. 10,000. Is that a crucial distinction? We must remember that this is a very exceptional trust, in which the creator of the trust authorised the trustees to use the money, to invest the money, in their own business. If in exercising their option Tawker & Sons had invested it in some other firm and had collected 9 per cent, from those people and handed it over to the plaintiff, there would have been no question that their trusteeship would have continued. Does it make any real difference that by the special authorisation of the settlor they invested the money in their own business? As is well known, if the subject of a trust is a house, the trustee cannot take a lease of that house for himself. But, if it were permissible for him to do so, could you say that his position as lessee would in that case entirely supersede and wipe out his position as trustee? That is what is suggested in this case--that a relationship of debtor and creditor has arisen which has superseded, overwhelmed and obliterated Tawker & Sons' trusteeship. For myself, I do not 'See how that in the circumstances can have happened. And we must remember that it is admitted that they were trustees for the plaintiff in this matter and that their trusteeship in some sense persisted throughout.

11. Another objection is based upon the evidence that no money passed between the plaintiff's father and Tawker & Sons when this trust was created. D.W. 1, Tawker & Sons' clerk, says that this was a matter of book adjustment. On that remark Mr. Krishnaswami Aiyar bases the contention that tracing is in this case impossible under the decision in In re Hallett and Company : Ex parte Blane (1894) L.R. 2 Q.B. 237. It is quite true that in this case Tawker & Sons, who held Rs. 10,000 of the plaintiff's father's money, did not pay that Rs. 10,000 into his hands, and he did not pay it back into their hands. But what happened in effect was that they held his Rs. 10,000 and he said 'Please keep that Rs. 10,000 on behalf of my son and invest it in your business.' The result of that was that, whereas before the transaction Tawker & Sons were liable to pay Rs. 10,000 to the plaintiff's father at any moment, after the transaction they held Rs. 10,000 which could not be claimed from them for eight years until the plaintiff became 21, and that Rs. 10,000 they could use in their own business. Is it not clear from that that Tawker & Sons' resources, their assets, were by that transaction augmented by the Rs. 10,000? That alone would take this case out of the ruling in In re Hallett and Company: Ex parte Blane (1894) L.R. 2 Q.B. 237. I may mention here that Tawker & Sons' clerk, who has been examined as D.W. 1, gave some confused evidence about the disposal of the Rs. 65,000 collected by Tawker & Sons on behalf of the plaintiff's father. From one part of his evidence it appears that so much of that Rs. 65,000 had been paid out by Tawker & Sons to different persons that less than Rs. 10,000 remained to be dealt with at the time the trust was created. But afterwards he contradicted himself. When we examine his evidence, what is it worth? He is not a man who could give any evidence about the matter of his own knowledge. It appears from the record that, when he was asked questions on this subject, he looked into some book which was in Court but which was not exhibited in evidence, and gave his replies from what he found in that book. I do not understand myself how that evidence was in any way admissible. It appears to me of no value whatever.

12. The last contention of Mr. Krishnaswami Aiyar is that the subject-matter of this trust was only a debt due from Tawker & Sons to the plaintiff's father. I have indicated already that I do not think on the facts that represents the position correctly. 1 may add that, if the plaintiff's father had merely transferred to Tawker & Sons the legal right to a debt due to him from Tawker & Sons, the debt would have been extinguished, and there would have been nothing on which the trust could operate. But obviously that is not a complete account of what happened.

13. In my opinion the plaintiff has sufficiently traced this trust property, the Rs. 10,000, to the assets of Tawker & Sons in the hands of the Official Assignee, and he is entitled to a charge on those assets. Though, with respect, I do not agree with all the steps by which Kumaraswami Sastri, J., reached his decision, I agree that his decision is correct. In my opinion, therefore, this appeal should be dismissed with costs.

Cornish, J.

14. I am of the same opinion. I think that the arrangement evidenced by Exs. A and B was a trust. It was common ground upon the pleadings of the plaintiff and defendants 1 to 8 that a trust was created by the plaintiff's father over a sum of Rs. 10,000 in the hands of the defendants and owing to the plaintiff's father for the benefit of the plaintiff and that the defendants accepted the trusteeship. The 9th defendant, the Official Assignee, by his written statement did not admit the fact or validity of the trust. But the only issue framed on this, point was 'What were the terms of the trust,' which would seem to import that there was in fact a trust. No question was put to the plaintiff's witness, the plaintiff's father, contradicting or challenging either the fact or the validity of the trust. Indeed, he was only asked one question about the trust and that solitary question put to him in cross-examination was : 'When was this trust created?'

15. But it has been argued that, notwithstanding the intention of the parties to stand towards one another in the relationship of trustees and beneficiary, the arrangement whereby the trustees were to have the use of the trust money for investment in their business is so incompatible' with the notion of a trust, that no trust can be inferred, and that the parties must be taken as standing in the relationship of debtors and creditor only in respect of the Rs. 10,000. No doubt it is a well-established principle that a trustee is to make no profit out of the trust fund, the reason for the rule being as stated in Lewin on Trusts, 13th Ed., p. 306, 'to keep trustees in the straight line of their duty.' It is equally a principle that, if a trustee trades with the trust money, the is accountable to the beneficiary for the profits. But it is open to a settlor when creating a trust to make it advantageous to the person appointed trustee to undertake the trusteeship, and to determine the purposes for which the trust fund shall be utilised, always provided that the purpose of the trust is not unlawful. There is nothing illegal in a settlor authorising by, the instrument of trust the trustee to invest the trust money in a business, whether the trustee's own business or some other business, and providing that interest shall be paid for the use of the money so invested. The only effect of- such an authority is to save the trustee from what would otherwise be a breach of trust. In my view, therefore, there is no ground for holding that the arrangement made by the plaintiff's father with defendants 1 to 8 is not capable of being treated as a trust.

16. Now the money being trust money, and if, as stated by the plaintiff's witness at the trial (in contradiction of the plaintiff's written statement in paragraph 7 of the plaint) it was invested in the defendants' firm, the plaintiff as beneficiary has a right to follow the money if he can trace it into the firm's assets now in the hands of the Official Assignee. Section 63 of the Indian Trusts Act gives him this right, and in my opinion it is unnecessary to look beyond this section. The relevant portion of Section 63 provides:

Where the trustee has disposed of trust property and the money or other property which he has received therefor can be traced in his hands, or the hands of his legal representative or legatee, the beneficiary has, in respect thereof, rights as nearly as may be the same as his rights in respect of the original trust property.

17. The two illustrations to the section describe the rights of a beneficiary where there has been a wrongful investment of the trust money by the trustee. But the right of the beneficiary to follow the trust money does not depend upon the act of the trustee being a wrongful one. This is clear from the principles stated by Sir George Jessel, M.R., in In re Hallett's Estate : Knatchbull v. Hallett (1880) L.R. 13 Ch. D. 696 and which are embodied in Section 63. At page 708 of the judgment Sir George Jessel says:

You can, if the sale was rightful, take the proceeds of the sale, if you can identify them. If the sale was wrongful, you can still take the proceeds of the sale, in a sense adopting the sale for the purpose of taking the proceeds, if you can identify them. There is no distinction, therefore, between a rightful and a wrongful disposition of the property, so far as regards the right of the beneficial owner to follow the proceeds.

18. The judgment proceeds to show that where property has been acquired by a trustee with money, partly trust money and partly the trustee's own money, the beneficiary can no longer elect to take the property, for the reason that it has been purchased with a mixed fund and not with the trust money purely and simply, and therefore the beneficiary is entitled to a charge upon the property for the amount of the trust money laid out in the purchase.

19. The evidence of the plaintiff's witness, who is the creator of the trust, is that this sum of Rs. 10,000 was in fact used by the defendants in the purchase of show-room stock. But his evidence is not very precise on this point, for in cross-examination he appears to admit that this was an assumption made by him from the fact that a few days after the receipt of this money certain show-room stock was purchased by, the defendants. Besides, the witness appears to be speaking of a transaction which took place some time at the end of August or the beginning of September before he left the defendants' shop, where he was employed as manager and prior to the creation of the trust in October. It is certainly difficult to reconcile this evidence with the statement in his letter, Ex. A, written on the 5th of October in which he speaks of a sum of about Rs. 13,000 the balance of money remaining in the defendants' hands in respect of which he requests the investment of Rs. 10,000 in their firm for the benefit of his minor son, the plaintiff. But I do not think that the inability of the witness to identify any particular stock as purchased with the Rs. 10,000 affects the plaintiff's right to follow, the trust money if it be established that the sum of Rs. 10,000 the subject of the trust was as a matter of fact invested in the defendants' business. The trust money, in my opinion, is traceable into the defendants' firm notwithstanding the plaintiff's inability at the time when the stock-in-trade of the firm became vested in the Official Assignee to point to any particular stock as representing the original investment. I think this is clear from what was said by Turner, L.J., in Pennell v. Deffell (1853) 4 De G.M. & G. 372 : 43 E.R. 551;

It is, I apprehend, an undoubted principle of this Court, that as between cestui que trust and trustee, and all parties claiming under the trustee, otherwise than by purchase for valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit' of such property, whether in its original or in its altered state, continues to be subject to or affected by the trust.

20. And after giving examples of this principle the Lord Justice added :

But of course in those cases as in other cases the property which is the subject of the trust must in some manner be ascertained.

21. Reference may also be made to Official Assignee of Madras v. Devakottah Nagarathar Sri Minakshi Vidyasala Paripalana Sangam : (1929)57MLJ99 where this doctrine was applied.

22. The learned Trial Judge accepted the evidence of the plaintiff's witness. I have already indicated that the witness's effort to identify particular show-room goods as the goods purchased with the Rs. 10,000 does not appear to me successful; but I see no reason to doubt that the transaction evidenced by Exs. A and B was a real and genuine transaction and that as a result of that arrangement the sum of Rs. 10,000 was in fact invested in the business of the defendants and utilised for the purposes of the business. No evidence has been called to disprove the investment of this money in the business, or to show that the stock which became vested in the Official Assignee on the firm's insolvency was in no wise, or could not be, the produce of the original investment of the Rs. 10,000.

23. In these circumstances, it seems to me that Kumaraswami Sastri, J., rightly held that the plaintiff was entitled to a charge on the sale proceeds of the stock realised by the Official Assignee, and I think that this appeal should be dismissed.


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