1. This is an appeal from an order of Walleir, J., passed in the insolvency of P.L.N.K. Subramaniam Chetty. The applicant, now appellant, was one P.L.N.K.M. Nagappa Chetty, son of a brother of the insolvent, and he claimed a preferential right to certain trust moneys said to be included in the funds in the Official Assignee's hands. At a partition in 1916 between the insolvent on the one hand, and the appellant and his brother Lakshmanan Chetty on the other, two sums each of Rs. 10,000 subscribed to as to 3/8 by the insolvent and as to 5/8 by the brothers:, were set apart' for two charities, with the parties to the partition as co-trustees. In respect of his own and his brothers' share in these trust funds the appellant, on 1st December, 1916, drew two hundiesi in favour of the insolvent on a firm at Madras known as the O. R. M. O. M. S. P. Firm (I will refer to it for short as the O.R.M. Firm). The insolvent kept the amounts of the hundies in deposit with this firm until 1920. It is common ground that he was at liberty to use the money in his business, undertaking to credit the trusts with interest at the nadappu rate; and, acting under this authorisation, he then carried out an adjustment with the O.R.M. Firm whereby the sums representing the appellant's contributions, amounting with interest to Rs. 15,732-15-9, were appropriated to discharge the outstanding liability of his own firm, which stood at the approximately equal figure of Rs. 15,700. His insolvency ensued in 1925, and it is in respect of two sums, one of Rs. 5,000 and the other of about Rs. 40,000, the sources of which I will mention later, and which form the only assets available, that the claim is made. It is to be noted that arguments have proceeded on the assumption that there was a perfected trust, no challenge to that position having been raised before us by the respondent's learned advocate.
2. Upon these facts the learned Judge has decided against the Official Assignee in regard to the contention that, as soon as the insolvent used the money in his business, a relationship of creditor and debtor was created between the trustees and himself in respect of it; and in favour of the Official Assignee that the money, although remaining trust money, cannot be traced. His conclusions upon this latter point are (a) that utilisation of the trust money to pay his own debt to the bankers was merely a book adjustment, which put an end to the process of 'following', (b) that, assuming that the process could be carried over that adjustment, the money in the Official Assignee's hands was demonstrably not part of the trust funds. The respondent endeavours to show that all these questions should be answered in his favour.
3. His contention on the, first point, which, as I have said, has been decided against him, is that, so soon as the money was authorisedly invested in the business, it ceased to be subject to the trust, which became impressed upon a corresponding debt due from the insolvent to the trustees. We have to look very carefully at the subject-matter of the trust, and consider whether, as soon as the insolvent permissively obtained control of it for his own purposes, it did not undergo a transformation in character. As an illustration of such a transformation may be given the case where a trustee is authorised to invest trust money in ordinary joint-stock securities. Clearly the trust passes away from the money and attaches itself to the scrip representing a right to dividends or interest; and the trustee is no longer responsible for anything more than the value of the securities, whether, when the time comes to realise, it be greater or less than the original sum. Similarly, if in the present case the money had been invested not in the insolvent's firm but in a third party firm, it is conceded that, as between the trustees and that firm, the relationship would be merely one of debtor and creditor; in other words, the trust would be impressed not upon the money but upon the debt. It has been urged that the present is really a case of that description, because there are two trustees and the money was only invested with one of them; and it cannot therefore be said that the two parties to the transaction are indistinguishably one and the same. Apart from this point, Mr. V.V. Srinivasa Aiyangar's argument for the appellant is that where a trustee is permitted to make use of the trust funds, his obligation as trustee so far overrides the mere liability as debtor which he would otherwise be under that he must account for the money, as trust money, just as much as if the user had never been in contemplation and, in fact, was in breach of the trust. No English case has been cited in support of the proposition, but one or two cases of this Court have had to consider it. The earliest of these cases arose out of the Arbuthnot insolvency: Official Assignee of Madras v. Krishnaswami Naidu I.L.R. (1909) M. 154. The trust deed which there came under consideration appointed the then members of the firm as trustees, and directed that the trust moneys should be placed in deposit, bearing 5 per cent, interest, with Arbuthnot & Co. Munro, J., came to the conclusion that the trustees and the banking firm could be regarded as two distinct and separate entities, when of course the liability of the Bank would be only that of a debtor. But he held further that, even regarding them as identical, there could be no difference in principle. 'When, as trustees under the deed, they, as directed, invested the money in their own firm, their liability in their capacity as trustees appointed by the deed was reduced in the same manner as if they had not. been members of the firm. When the money was invested with them as bankers, the same result must, there being no reason to the contrary, have followed as would have followed had the money been invested with another bank with which they had no connection.'
4. Abdur Rahim, J., took the same view, observing that the effect of the directions to invest the money was that Arbuthnot & Co. were authorised to use the money as their own and to that extent they became debtors to the beneficiaries. The position of course would have been totally different if the investment had been in breach of the terms of the trust. This decision was dissented from by Kumaraswami Sastri, J., in Krishnaji Bhat v. Sadasiva Tawker (1926) 24 L.W. 869, where a father had left Rs. 10,000 with Messrs. Tawker & Sons to be invested in the business as trust money for the benefit of his minor son. He held that the firm of Tawker & Sons were trustees in respect of that sum of money, not debtors, so that upon their insolvency the Official Assignee had to give priority to that claim over the claims of creditors. But the argument for which the Arbuthnot case was cited as authority was that since Tawker & Sons were allowed to use the money there was no trust; that the trust was ipso facto destroyed. That, I agree, is an untenable position, and with all respect, I think that the reasoning which I have abstracted from the case shows that that was not the view of the learned Judges who decided it. It may be that the practical result is the same, but that is due, not to the destruction of the trust, but to the decision of the trustees to expose the trust funds to ordinary trading risks. I find it very hard to see how when trust money is handed over to any person, he be or he be not a trustee, to use in his business, and subject to the payment of interest, no relationship of creditor or debtor is set up. The circumstances that he may use the money as his own, and that he has to pay interest, seem to me to point clearly to the engrafting of a contract upon the trust, whereby title to the money is transferred, and the trust no longer can look to that particular sum of money, as its res or subject-matter, but to a promise to pay an equal sum. If he holds it purely as trust money he is debarred by Section 51 of the Trusts Act (II of 1882) from dealing with it for his own profit, and the veto so imposed seems to be absolute, and not subject to modification by the terms of the trust It will be seen that whereas Sections 46 to 48 and 50 of the Act all contain some such phrase as 'Except where the instrument of trust otherwise provides,' there is no qualification of this kind to Section 51. The true principle seems to be that the terms of the trust permit the conversion of the money into something other than money,--here the obligation to repay the debt incurred--so that when the money comes to-be used it ceases to be trust money. The same case of Tawker & Sons came on appeal before Reilly and Cornish, JJ., in Official Assignee of Madras v. Krishnaji Bhat (1929) 59 M.L.J. 718 and Reilly, J., disposed of this argument in the same manner, holding, no doubt quite rightly, that a relationship of debtor and creditor had not, 'superseded, overwhelmed and obliterated' Tawker & Sons' trusteeship. Both the trusteeship and the relationship of debtor and creditor were there, though they may have been combined in the same individuals; and we have been referred to no authority for the proposition that, when so combined, the legal effect is different from what it would be when the individuals are separate.
5. To the best of my judgment, therefore, this contention avails to dispose of the appellant's case; but I confess that, although it persuades me, it is with some relief that I find another ground, not equally open to the charge of fine-drawn reasoning, or to the same extent the subject of differing judgments, upon which to arrive at the same conclusion. It is admitted that, if the trust money is to be recovered in full from the assets in the Official Assignee's hands, it must be by application of the doctrine of 'tracing' or 'following'. I am in some doubt whether that doctrine applies at all to cases of authorised conversion, and certainly the English cases cited deal, I think exclusively, with disposal by the trustee in violation of the terms of the trust. But it has not been suggested that, if it so be that you can follow money used as it was used in this case, any greater latitude, of principle or of inference is permissible than if the conversion involved a breach of trust. The arguments have been largely based upon cases in which, as I have said, the conversion; has been of this latter kind, and I think that the appellant's claim must stand or fall according to the legal principles to be derived from them.
6. The earlier English cases bear witness to the evolution of the equitable doctrine of tracing, as applied to trust funds mixed with the trustee's own funds in his private banking account. It appears that in Lord Hardwicke's time (1746 to 1755 A. D.) trust money could not be followed unless it was definitely earmarked. Then in 1850 it was held in Pennell v. Deffell (1850) 43 E.R. 551 that trust money may be followed into a private account in which it is mixed with personal funds, though the rule in Clayton's case (1816) 1 Mer 572 that drawings must be allocated to deposits in order of time, was held to apply. There was clear observance in this case of the principle that the presence of a definite sum of trust money in the account must be, ascertained before it can be claimed. In the matter of the applicability of the rule in Clayton's case (1816) 1 Me 572 as between trust and private funds, In re Hallett's Estate, Knatchbull v. Hallett (1880) 13 Ch. D. 696 marks an advance, that rule being held only to apply as between competing cestui que trustent, as between trust funds and private funds, a trustee must be presumed to have drawn upon the latter until they are exhausted. In this case Jessel, M.R., has reviewed at length the progress of the equitable theory of tracing, concluding with a statement of the law as it then stood and, for all that we have been shown, now stands. The original subject-matter of the trust may be traced into what other form different from the original it may have passed; the right only ceases when the means of ascertainment fail. If it is money, and has become mixed with other money, equity will follow it and create a charge upon the whole for the satisfaction of the claim. The principles of In re Hallett's Estate (1880) 13 Ch. D. 696 as to following were applied by Lord Haldane, L.C., in circumstances of a different kind in Sinclair v. Brougham (1914) A.C. 398. Certain persons had deposited money in a Building Society not authorised to receive such deposits, so that the title remained vested in the depositors. That being so, they would not succeed unless they were able to trace their money into the hands of the society or its agents as actually existing assets. 'Their claim cannot be in personam and must be in rem, a claim to follow and recover property with 'which, in equity at all events, they had never really parted.' If this distinction between a right in personam and a right in rem is kept clearly in view, it affords, I think, index to the necessary limits of the doctrine of tracing. There is only one other English case which, I think, requires notice. It was a case of the mixing of trust funds with private, funds in a private banking account, which was afterwards drawn upon by the trustee down to a certain minimum figure. Although it was subsequently replenished with private funds, Sargant, J., in James Roscoe (Bolton), Limited v. Winder (1915) 1 Ch. 62 held that the trust could not avail itself of this circumstance, but was confined to the minimum figure as all that was left, of the trust money. This case again marks the limits which have been set to the theory of tracing in England. Once the competing claimants can show that the money, wholly or in part, is other than the trust money the claim fails.
7. Before considering two cases which have been decided by this Court, reference may be made to an English decision upon a special feature which is said to be present here. It has been already noted that on 10th February, 1920, the insolvent adjusted virtually the whole amount of the trust funds in the hands of the O.R.M. Firm against his own liability to that firm, and there can be no doubt that this was a book adjustment, no money passing. Following the decision In re Hallett & Co., Ex parte Blane (1894) 2 Q.B.D. 237 the learned Trial Judge has held that 'a settlement of account cannot be followed', so that the quest fails at this early stage and for this reason. I think that, if the facts of Ex parte Blane (1894) 2 Q.B.D. 237 are closely considered, it will be seen that Lord Esher's dictum that 'a settlement of account cannot be followed' must be read in the light of the special circumstances, and that the case is really only an exemplification of the necessity--clearly stated by Lords Justices Lopes and Davey--of being able to follow certain specific property. It was clear in that case that the trust money never came into the hands of the defaulters' bankers, but reached another destination by means of the settlement of account referred to.
8. In the present case it is, I think, quite immaterial whether we regard what happened as a mere settlement of account between the insolvent and the O.R.M. Firm, or whether we take it that that firm paid the Rs. 15,000 odd trust money in cash, and the insolvent thereupon paid it back in discharge of his overdraft. There is no doubt that, on either supposition, he used the money for the purposes of his firm, as he was free to do, and that it was disposed of in this particular way. The appellant contends that that is really all he need show--that it went into the assets--to give him a first claim upon any subsisting assets for the whole amount. For this purpose we must regard the trade assets, he says, as a single entity, with an identity enduring throughout every phase and transformation, and taking its; latest form in the sums now in the Official Assignee's hands. Now an assumption of this kind is to be found in two cases of this Court, Official Assignee, Madras v. Minakshi Vidyasalai Sangani I.L.R. (1929) M. 919 : 57 M.L.J. 99, decided by Coutts Trotter, C.J., and Anantakrishna Aiyar, J., and the already cited case, The, Official Assignee of Madras v. Krishnaji Bhat (1929) 59 M.L.J. 718. I think, it is clear, from the English cases cited before us and which I have made some attempt to abstract, that this would take the theory of tracing a good deal further than any actual English decision would warrant, and in fact in both instances reliance was placed, not upon an actual decision, but upon an illustration employed by Turner, L.J., in Pennell v. Deffell (1850) 43 E.R. 551, the case of an executor of a deceased partner leaving the latter's capital with the surviving partners to trade with, and the persisting identity of the partnership share through all its fluctuations. Whether or not this would afford a valid parallel to such a process of tracing as we have now to deal with is not an easy question to answer, and 1 do not think that I need try to answer it, because it appears to me possible to accept the general proposition while attaching to it certain seemingly necessary qualifications. The general argument is most fully set out in the judgment of Reilly, J., and he adopts as his premises that
if you arc 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. 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.
9. That is, if I may say So' with respect, an unexceptionable statement of the law. It may, too, be not stretching it too far to adopt, as a general presumption, the position, whether you can prove it by evidence or not, that trust money put into a business is traceable to the eventual assets. This is, I think, all that these two decisions lay down. But such a presumption, if the principles of tracing are not to be given the go-by altogether, must be rebuttable, and it must be open to persona interested in the distribution of the assets to show that the trust money could not possibly form part of them. This is recognised by Cornish, J., in The Official Assignee of Madras v. Krishnaji Bhat (1929) 59 M.L.J. 718, where he says that 'no evidence has been called to show that the stock which became vested in the Official Assignee was in no wise, or could not be, the produce of the original investment of the Rs. 10,000.' Now in the present case there are two sums in the Official Assignee's hands--one of Rs. 5,000 not at all derived from the business in which the trust money was invested, the other of some Rs. 40,000 being income-tax levied on 27th July, 1918, while the trust money was still on deposit, and refunded after that money had been disposed of, and, in fact, after the adjudication. By no fiction or assumption is it possible to say that any part of the trust money enters into the composition of those sums. They are shown to be wholly otherwise composed. That being so, no doctrine of tracing, no claim in rent, can avail to get the trust money out of them.
10. In the result therefore the appeal fails and is dismissed with costs.
Bhashyam Aiyangar, J.
11. I agree with the judgment just pronounced by my learned brother. The facts are fully stated therein and need not be repeated. I shall only add a few words on the questions of law which were argued before us.
12. Three chief points were raised before the learned Trial Judge. The first was that, as the charities had been constituted on the footing that their funds could be invested and used by the insolvent-trustee in his own business, in consideration of his paying nadappu interest, he became, when he accordingly invested and used them in his own business, only a debtor to the trust with reference to those amounts and consequently the trust can have no charge on, or preferential right in, his general assets in insolvency, but must only rank along with the ordinary creditors. The second proceeded on the assumption that what took place between the O.R.M. Firm and the insolvent on the 8th February, 1920, was a mere book adjustment and that there was no passing of money into the hands of the insolvent and it was to the effect that, as no money actually passed, there was nothing to follow. The last point was that the two specific sums of money now in the hands of the Official Assignee have no connection whatsoever with the trust moneys and therefore no preferential right can, in any event, be claimed with reference to them on behalf of the trust. The learned Trial Judge has answered the first point against the Official Assignee but the other two points in his favour.
13. Now, taking the first point, there is direct authority on it in favour of the Official Assignee; in the case of The Official Assignee of Madras v. Krishnaswami Naidu I.L.R. (1909) M. 154 decided by Munro and Abdur Rahim, JJ., the facts of which are practically indistinguishable from those of the present. But the learned Trial Judge has decided the point against the Official Assignee on the strength of a later and a recent judgment of Kumaraswami Sastri, J., in Krishnaji Bhat v. Sadasiva Tawker (1926) 24 L.W. 869 which has since been confirmed on appeal by Reilly and Cornish, JJ., in The Official Assignee of Madras v. Krishnaji Bhat (1929) 59 M.L.J. 718. The earlier case is referred to in the judgment of Kumaraswami Sastri, J., who distinguished the judgment of Munro, J., and differed from that of Abdur Rahim, J., therein, but not in the judgment on appeal. The later case was one; of private trust but otherwise similar to the present. There the plaintiff's father had entrusted a sum of Rs. 10,000 with Messrs. Tawker & Sons for the benefit of the plaintiff and authorised them to invest the said sum for interest at 9 per cent, in their own business or in any other firm as they may deem fit. The plaintiff was a minor. The document which evidenced the trust provided that the firm should pay the interest from time to time and the principal to the plaintiff on his attaining the age of 21 years. The firm invested the amount in their own business and some time later became insolvent. The question then arose whether the cestui que trust, the plaintiff, was entitled to a preferential right in the general assets of the firm to the extent of the said sum and it was decided in the affirmative in the Trial Court as well as on appeal. The, point was raised and considered whether the plaintiff can claim the right of tracing in the face of the authority which had been given to the trustees by the settlor to invest the money in their own business and it was answered in the affirmative.
14. This answer, if correct, would apply to the present case also and the decision of the learned Trial Judge on the point under consideration must be upheld. But, with the greatest respect, I have found myself unable to agree with it. Now, let us consider in what cases the right to follow trust property can arise to the cestui que trust. Here, it is essential to keep in mind the true nature of the right. It is strictly a right in tern, that is, to the thing itself. No doubt equity has given a somewhat wider scope to this conception when dealing with money which gets mixed up with other money but it is quite a natural and proper extension and in no way opposed to the basic principle of the conception. Thus,, if a sum of Rs. 100 belonging to a trust is mixed up by the trustee with another sum of Rs. 100 of his own, either in his cash chest or in his account with a banker, it may no doubt be impossible to separate the identical coins which belonged to the trust, but it does not make the least difference which sum of Rs. 100 is taken back for the trust out of the mixed fund, so long as the amount is identical. This, indeed, is the principle recognised and laid down by-Courts of Equity in the series of cases beginning with Pennell v. Deffell (1850) 43 E.R. 551. Now, the right to follow the trust property can obviously arise only where the trustee deals with it inconsistently with the trust, in other words, when he commits a breach of trust. So long as the trustee keeps the trust property apart or disposes of it by sale or otherwise as directed or authorised by the terms of the trust, it is clear that there, can be no question of following the trust property. When it is disposed of in pursuance of the trust, title validly passes and the estui que trust, has no further right in respect of it. Whatever the trustee obtains in lieu of the trust property in such a case belongs to the trust and the cestui que trust, ipso facto becomes entitled to it, and there is no scope at all here for any following. When a trustee wrongfully sells the trust property, the cestui que trust cannot merely disregard the sale and follow the property in the hands of the alienee (except where the alienee is a bona fide purchaser for value) but he can also 'in a sense' adopt the sale and seize the proceeds, if possible, in the hands of the trustee. The rights of the. cestui que trust are thus only either (1) to follow the trust property where the trustee has dealt with it in breach of the trust, or (2) to have the proceeds brought into the. trust by way of substitution, where there has been a disposition in accordance with the terms of the trust or in election by the cestui que trust to abide by the disposition. This second right is spoken of by Jessel, M.R., in In re Hattett's Estate, Knatch-bull v. Hallett (1880) 13 Ch. D. 696 as a right to follow the proceeds' (see p. 709). It will avoid confusion here to confine the application of the word 'follow' to trust property only.
15. Coming now to the present case, the trustee was, as observed already, authorised to invest the trust money in his own business in consideration of his paying nadappu interest. Therefore, when he collected the trust moneys from the O.R.M. Firm and put them in his own business, he was acting within his rights and there was no breach of trust. The moneys having thus left the trust and rightfully gone into the trustee's own business, it is difficult to see how those moneys can be followed, that is, made the object of pursuit. Suppose a trustee lends out trust moneys to a third person in pursuance of a direction to that effect; can it be contended that the cestui que trust has a right in rent to the moneys so lent out, such as would enable him to follow them in the debtor's hands? The contractual obligation of the debtor having taken the place of the trust moneys and thus become, the res, it is clear that the moneys which became the debtor's property could not be followed. Why then should it make a difference if the loan was to the trustee's own business instead of to a third person? When the settlor authorises the trustee to invest the trust money in his own business, does he contemplate anything more than that the liability of the trustee in his personal capacity should form the object-matteir of the trust? Suppose a person had lent money to another for his business; is there anything to prevent the former from settling that debt on trust and constituting the debtor himself a trustee? In such a case, can the cestui que trust claim a right in rent over the money which had been lent? If not, it should, I think, follow that no such right is available even where the trustee invests the trust money in his own business for interest, under an authority provided by the settlor.
16. In his judgment in Krishnaji Bhat v. Sadasiva Tawker (1926) 24 L.W. 869 Kumaraswami Sastri, J., observes:
if the author of the trust deed agrees that the trustee can use the money for his own benefit, there seems to be no reason for saying that the trust goes and that it cannot be trust property in any sense of the term because of this liberty given to the trustee.
17. The contention, however, is not that 'the trust goes' in such a case but only that when the trustee is authorised to use and accordingly uses the trust money in his own business for interest the object-matter of the trust is no longer the money but the personal obligation of the trustee which alone fetches the interest. Subject only to this modification, the trust will subsist and its administration will have, to be carried on by the trustee according to law and the other terms of the trust. If thus the personal obligation of the trustee becomes the object-matter of the trust in cases in which he is authorised to use the trust money for his own benefit in consideration of his paying interest, there can be no difference between the claim of the trust as creditor and the claims of the other creditors over the personal assets of the trustee. The trust can have no preferential right or charge but only rank along with the other ordinary creditors.
18. In this connection, reference may, I think, be usefully made to Section 52, Clause (2) (c) of the Presidency Towns Insolvency Act (III of 1909). Under that clause goods 'in the possession, order or disposition of the insolvent in his trade or business by the consent and permission of the true owner under such circumstances that he is the reputed owner thereof' are declared to be the property of the insolvent, divisible among his creditors. The case of trust money which the trustee is authorised to use for his own benefit must, it seems to me, be a fortiori so divisible.
19. I think for these reasons that the answer to the first point must be in favour of the Official Assignee.
20. As regards the second point, the learned Trial Judge has held that what took place between the O.R.M. Firm and the insolvent on the 8th February, 1920, was a mere book adjustment and there was no passing of trust money between them and consequently there was nothing to follow. I regret I am unable to take the view that there was no passing of trust money from the O. R. M. Firm to the insolvent. As the accounts stand, it does not appear possible to assert affirmatively that the entries of the payment of Rs. 8,740-8-9 of the water pandal charity and Rs. 6,992-7-0 of the Kalaiyar Koil charity by the O.R.M. Firm to the insolvent as trustee or of the sum of Rs. 15,700 by the insolvent to the O.R.M. Firm to the credit of his personal account represent transactions in which no cash passed. On the other hand, the fact that the total of the charity funds is not identical with the amount of the personal credit indicates that cash should have passed. Let us, however, assume that no hard cash actually passed and there was only an adjustment. But how does it matter? The adjustment is truly and strictly only a payment and a repayment, without the formality, unnecessary in such a case, of passing cash for either transaction. It will have the same effect on the cash balance of either party as if cash had passed for each entry. Therefore, there should be the same legal consequence or right with reference to each item of the adjustment, as in the case of an actual payment. It cannot be, and is not, denied in this case that, if the O.R.M. Firm had paid the charity funds to the insolvent in cash, they could be followed in the hands of the latter. If so, there appears to be no reason to deny such a right merely because such payment was dispensed with in whole or in part as the insolvent was making another payment in his personal capacity to the same firm on the same day. To say that there was no passing of trust money from the O.R.M. Firm to the insolvent-trustee would imply that it is still with the former which is admittedly not the case.
21. The decision relied on by the Official Assignee in support of his contention on this point, namely, In re Hallett & Co., Ex parte Blane (1894) 2 Q.B.D. 237 does not in my opinion apply to the facts of this caste. I do not think it is an authority for the proposition that a book adjustment has different legal consequences from what would have followed had actual payment been made for each of the entries going to make up the adjustment. On the other hand, the decision therein seems to have proceeded on the ground that the book adjustment in that case did not make out that the trust money had passed into the fund into which it was sought to be traced. This appears from the observation of Davey, L.J., that even if Hallett & Co., the fiduciaries, had received the trust money, namely, 1,600 in cash, there would have been no right to. follow it as it was not lent to Cocks, Biddulph & Co. into whose possession, it was sought to be traced but only 'applied by Hallett & Co. in paying on behalf of other customers 1,600 to Hewitt & Co. for which they got a credit from their other customers.' Lord Esher, M.R., also says the same thing in the following' passage in his judgment:
Had there been anything in existence representing that which the bankers were authorised to collect, Colonel Blane might have followed it; but he cannot show that he can only show a transaction between Hallett. & Co. and other persons.
22. As in the present case, the trust moneys in question cannot but be held to have passed into the hands of the insolvent-trustee by what took place on the 8th February 1920, there is no question of their being untraceable. The insolvent-trustee having at once invested them in his own business as authorised by the terms of the trust and thereby rightfully converted them into a debt due by himself, they became free of the trust and incapable of being followed. That, however, is a different point and it has been dealt with already.
23. We are now left with the third point. It does not arise in the; view which has been taken on the first point. I may, however, state that, even if I am wrong on that point, the contention of the Official Assignee must be upheld and the application must fail on the point under consideration as held by the learned Trial Judge. Now, it cannot be doubted that, for following trust money into another fund, it is absolutely necessary to make out that the former came into the latter or into something of which the latter can be said to be a substitution, either immediate or mediate. .. This principle is recognised in all the cases relating to the question of following trust moneys. (Set: Pennell v. Deffell (1850) 43 E.R. 551, Frith v. Cartland (1865) 71 E.R. 525, In re Hallett's Estate, Knatchbull v. Hallett (1880) 13 Ch. D. 696, Sinclair v. Brougham (1914) A.C. 398 and James Roscoe (Bolton), Ltd. v. Winder (1915) 1 Ch. 62.) In the present case, out, of the two sums of money in the hands of the Official Assignee, one, namely, the sum of Rs. 5,000 was admittedly not derived from the business in which the trust, moneys were invested; and the other, that is. the sum of Rs. 40,000 is a rebate from an amount paid for income-tax long before the trust moneys came into the hands of the insolvent-trustee from the firm of O.R.M. and no attempt was made to show any manner of connection between that sum and the trust moneys. It is, therefore, perfectly clear that the trust cannot claim any charge or preferential right over the specific funds in question.
24. On the conclusions arrived at on the first and third points, the decision of the learned Trial Judge must be upheld and the appeal dismissed with costs.