bank as trustee supriya

8/18/2019 Bank as Trustee SUPRIYA

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Bank as Trustee

Introduction

The relationship of banker and customer is not something which is static but is a relationship

which on many occasions changes its colour from one relationship to another. In a normal

course of business, the basis of banker and customer relationship is contract and it is the

contract which governs the obligations of the parties. The apparent and most obvious benefit

that one derives by impleading the bank liable as a trustee is of separation of funds from the

general assets of bank so as to claim preferential right in the event of bankruptcy. It seeks to

examine the circumstances under which a bank may be held liable as a trustee.

Judicial Principles

It must be remembered that mere entrustment of money to the bank does not make the bank

trustee. The general presumption of the relationship between the banker and its customer is

that of debtor-creditor. To prove that banker was liable as trustee, plaintiffs have to show the

existence of those facts which can dispel the general presumption of debtor-creditor

relationship. Over a period of time following are the various circumstances under which the

banks has been fastened with the liability of trustee. owever the list is by no meansexhaustive.

A. Trust Accounts

!here a customer deposits money with the bank a debtor-creator relationship is established

under which the bank ac"uires the beneficial title to the funds. The bank is entitled to use the

funds in any manner it deems fit. The customer does not ac"uire any interest or charge over

the bank#s general assets and the deposit account is merely an acknowledgement and record

of the credit balance standing to customer#s account. !here, however, a bank undertakes to

act a trustee and holds deposits on trust, the bank has no power to use those deposits as a part

of general assets unless the trust instrument expressly authori$es to do so. In such

circumstances the trust money may solely be applied to the benefit of the beneficiaries of the

trust account. The bank, therefore, in such cases cannot discharge its obligation with respect

to the trust property by giving an account of the credit balance.


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B. Special Purpose: The Quist close Trust

!hen the money is entrusted with the bank for a special purpose, until the fulfilment of the

same the funds remain with the bank in its capacity as a trustee. This was the principle that

was enunciated by ouse of %ords in the case of Barclays Bank %td. v. &uist close

Investments %td. In this case a company was promised loan finance if it first obtained

finance from another source to pay a share dividend that had already been declared. The

respondents pursuant to this made a loan for the amount for the payment of dividend and the

che"ue was paid into a special account with B bank that was created specifically for this

purpose. !hen the company went into voluntary li"uidation before this dividend was paid,

the "uestion with which the court was posed with was whether the investment company had

the e"uitable interest in the money paid over of which the bank had at all the times notice of.

It was argued by the respondents that under the e"uity if ' pays money to B upon the terms

which are accepted by it that the money will be applied for a specific purpose, B is sub(ect to

an obligation to apply the money only for that purpose and cannot himself assert a beneficial

title to it and the money is sub(ect to a trust of which B is a trustee. The ouse of %ords ruled

in the favour of the investment company and noted that the money was never intended to

form part of company#s assets but was specifically directed at those entitled to the final

dividend. This being the primary trust and since this was no longer possible, it reverted to the

respondent according to a secondary or resulting trust to that effect. It was also noted here

that the trust and debt relationship could co-exist and the existence of one was not an

impediment to the other.

C. Money Received With Special Instructions

This can be said to be continuation of the preceding subsection. ' bank, when receives

money with a special instruction to retain the same pending further instructions or to pay over

the same to some another person who has no banking account with the bank and bank accepts

the instructions and holds money pending directions from such other person or in such

circumstances holds the money in its capacity as a trustee.

In the case of Indian ume )ipe *o. v. T + & Bank the company had a current account

with the Travancore bank at +agarcoil. *ompany had no account with the Bombay branch.

The company had instructed the Bombay branch of the bank to collect a che"ue in its favour

drawn on Indian +ational Bank, Bombay and to remit the proceeds to +agarcoil branch to the

credit of the company. Before such transfer bank went into li"uidation and the funds

remained with the Bombay branch. It was held by the court that the bank was holding his

principal#s money for special purpose. The company was held entitled to amount of the


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che"ue. !hile delivering the (udgement the hon#ble court placed reliance upon an nglish

decision in which a person advanced money to a bankrupt for settling the claims with his

creditors. On failure of the purpose, it was held that the repayment of money was protected as

the money advanced was for a specific purpose and was clothed with specific trust.

. Constructive Trustee

nder this head liability of bank shall be discussed when it acts as an agent of the person who

has committed breach of the trust. 's the principle evolved through the case

of Barnes v. 'ddy, the liability on a stranger to the trust could be imposed in the

circumstances where he knowingly assisted the dishonest trustee and received/dealt with a

trust fund in breach of trust. +oteworthy are the observations made by %ord 0elborne which

are chanted by every scholar confronting this sub(ect as sacred text, those who create a trust

cloth the trustee with a legal power and control over the trust property, imposing on him a

corresponding liability. That responsibility may no doubt be extended in e"uity to others who

are not properly trustees if they are found either making themselves de son tort or actually

participating in any fraudulent conduct of the trustee but on the other hand strangers are not

be held made constructive trustees merely because they act as agents of trustees in

transactions within their legal powers unless those agents receive and become chargeable

with some part of the trust property or unless they assist with knowledge in a dishonest and

fraudulent design on the part of the trustees.

!no"in# Receipt

The elements that are necessary for liability to be imposed under the 1knowing receipt# head

are as follows2

• There must be a trust or fiduciary relationship

• There must be a misapplication of trust money by the trustee or fiduciary3

• There must be a transfer of moneys to the bank , the bank must receive the misapplied

money for its own benefit3 and fourth, the bank must have the re"uisite degree of

knowledge such that it acts with want of probity.

4or liability under this head, all that is re"uired is a civil misapplication. The bank must

receive funds which have been misapplied, with knowledge that they have been misapplied.

ere all that is necessary is that the trustee or fiduciary has committed a civil wrong. That

would be a sufficient misapplication. Thus, where a company makes a payment to another


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outside the powers of the company, which is not dishonest or fraudulent, the recipient of

those moneys will hold them as a constructive trustee.

Trusteeship e Son Tort

'lthough a bank is a stranger to the trust, it may take upon itself the responsibility to act on

behalf of beneficiary. 0uch a person, who has not been appointed as a trustee may also be

held liable as constructive trustee if he in such circumstances commits breach of trust. By

this unauthorised intermeddling, the bank may be held to have usurped the role of the trustee

and to have constituted itself trustee de son tort.

ere the stranger#s conduct is e"uated to the declaration of himself as trustee. The case

of Blyth v. 4ladgate serves a good illustration of a situation of such kind. In this case

solicitors had received the proceeds of a trust investment on behalf of their trustee clients.

'fter the death of the last surviving trustee, and before new trustees were appointed, the

solicitors reinvested the money into an improper security. They were held liable for loss

suffered by the trust as a result. ' person who assumes to act as trustee will be sub(ect to all

the liabilities of an expressly appointed trustee. e will therefore be liable to make good any

loss resulting from his unauthori$ed conduct.

Statutory Trustee

0ection 5 of the Banking 6egulations 'ct, 7898 authori$es the bank to act as trustee as a part

of its banking function. owever the standard of care that a bank has to adopt in such cases is

higher than that of a standard of ordinary prudence. It was held in the case

of Bartlett v. Barclays Bank Trust *o %td that a professional corporate trustee, such as a bank,

owed a higher duty of care and was liable for loss caused to a trust by neglect to exercise the

special care and expertise that it professed to possess.

's general rule, trustee if earns profit by using the trust funds, it has to account for it.

owever, in the cases where a bank is acting as a trustee and it puts the trust funds on deposit

with itself, the terms of the charging clause in the trust instrument may be such which exclude

the bank from having to account to the beneficiaries, for profit from employing the trust

money in its business.

The case of *anera Bank v. +T)* serves as a good illustration where the bank is acting as an

agent under s.5 of the Banking 6egulation 'ct. 6eiterating what has already been mentioned


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in the preceding sections, it was held that the bank cannot mix the funds/proceeds of the trust

with that of its own.

Conclusion

:ere entrustment of money with the bank does not put the bank in a state of trustee. There

has to be something else on the facts to dispel the presumption of debtor-creditor relationship.

!ith respect to trust accounts not only the actual notice but even constructive notice would

suffice to hold banks liable as a trustee. owever, if the bank under the circumstances cannot

be said to have the knowledge of the trust, it cannot be held liable. In dealing with trust

accounts the bank also has to ensure that the trustees act within the scope of their power. This

merely indicates that bank cannot wilfully shut its eyes to blatant breach of trust. If the

money is entrusted with the bank for a special purpose, until the fulfilment of the same the

funds remain with the bank in its capacity as a trustee. ' bank, when receives money with a

special instruction to retain the same pending further instructions it holds them in its capacity

as a trustee until the fulfilment of instructions. 0ometimes, even after the purpose for which

the money was entrusted has been carried out, in the absence of the further instructions, the

bank does not cease to be a trustee. Bank while acting as a collecting agent is a trustee so

long as the bill is not reali$ed or not collected. But as soon as the bill is collected it then

depends upon the facts of each case whether with regard to the proceeds, the bank is a trusteeor a debtor.

!ith respect to constructive trusteeship, the law in its present state is unsatisfactory for being

uncertain. There exists no definite criterion or test to determine the meaning 1dishonest# and

that of 1knowledge#. ven in the cases of 1knowing receipt# the term 1beneficial receipt# is

presently interpreted without having regard to banking practices. ence need exists for

reform. 's per section 5 of Banking 6egulation 'ct, banks can perform the functions of

trustee with a higher standard of care than what normally exists for others. 'lso, the amounts

forwarded by the subscribers, under various provisions of *ompanies 'ct make the bank a

statutory trustee.


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bank as trustee supriya

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