P.L.N.K.M. Nagappa Chettiar vs O.R.M.O.M.S.P. Firm and Another

The parties to this appeal are Nattukottai Chettiars. The appellant was the plaintiff in the suit. He is a trustee and he sued in that capacity on the

original side of this Court to recover from the first respondent, a banker, trust moneys which he alleged the first respondent had wrongly-applied in

reduction of a debt owed by the second respondent. The first respondent is one Lakshmanan Chettiar, who carries on business in Madras under

the style of the Order R.M.O.M.S.P. Firm. The second respondent is the uncle of the appellant and a co-trustee.

The father of the appellant was one Meenakshisundaram Chettiar, who did business in Madras with the second respondent, his brother.

Meenakshisundaram died in 1914. After his death the joint family consisted of the appellant, his minor brother Lakshmanan and the second

respondent. In 1916 the appellant and his brother separated from the second respondent and a deed of partition was executed. It was decided by

the appellant and the second respondent that they should set aside out of the family funds two sums of Rs. 10,000 as endowments of specified

religious charities. One sum of Rs. 10,000 was to be devoted chiefly to the maintenance of a water-supply at the Tirukalikundram temple, a

famous Hindu temple in the Chingleput District, and the other sum of Rs. 10,000 was to be an endowment of another Hindu temple, known as the

Kalayar Koil in the Ramnad District. It is common ground that out of the Tirukalikundram fund the temple piper was also to be paid. The appellant

and the second respondent were to contribute to these funds in the proportions of and respectively. These provisions except the provision with

regard to the payment of the piper were included in the deed of partition, which also provided that the appellant and the second respondent were

to act as the trustees of the funds. The trust funds were created and it is admitted that the second respondent, being the uncle of the appellant and

much older, was given the management of them. It is f also admitted that the second respondent was given the right of investing the trust funds in his

own business, if he so decided.

On the 1st December, 1916, the appellant drew, as his contributions to the two trusts, two hundies, payable to bearer, one for Rs. 6,250 and

the other for Rs. 5,000. Previously a sum of Rs. 2,000 had been set aside for charity and this sum was taken into account in calculating the

amounts which the appellant had to provide. The appellant handed the two hundies to the second respondent for investment on behalf of the trusts.

At all material times both the appellant and the second respondent had banking private accounts with the first respondent. When the trusts were

created the proprietor of the O.R.M.M.S.P. Firm was Subramaniam Chettiar, the father of the first respondent. He had assisted at the partition of

the properties between the appellant and his brother and the first respondent and had signed the partition deed as a witness. The second

respondent handed the two hundies drawn by the appellant to Subramaniam Chettiar, who realized them by debiting the appellant''s personal

account, which was in credit, with the amounts. He then opened accounts in his books in the names of the two trusts, allocating to the

Tirukalikundram temple trust the hundi for Rs. 6,250 and to the Kalayar Koil temple trust the hundi for Rs. 5,000. The allocations were in

accordance with the instructions given to him. The arrangement made by the second respondent with the first respondent was that these moneys

were to remain with the first respondent as thavanai loans with interest calculated annually. I should mention that the hundies themselves disclosed

that they represented trust funds and an endorsement was made on each hundi by the then agent of the O.R.M.O.M.S.P. Firm acknowledging that

the moneys had been received by the Firm. Subramaniam Chettiar died in 1918 and the business was then taken over by the first respondent, who

had knowledge of it before he succeeded to it. It is not disputed that he knew that the moneys in these accounts represented trust moneys. His

own books showed this.

For many years the second respondent had a large business in Madras and another business in Penang, but he became financially involved and

on the 4th January, 1926, he was adjudicated an insolvent by this Court on a petition filed on the 10th October, 1925. On the 10th February,

1920, the second respondent had overdrawn his account with the first respondent '' to the extent of Rs. 15,700. The total amount standing to the

credit of the two trust funds on this date was Rs. 15,732-15-9. With the consent of the second respondent the first respondent transferred Rs.

15,700 of the Rs. 15,732-15-9 standing to the credit of the trust accounts to the private account of the second respondent and paid to him the

balance of Rs. 32-15-9 in cash. The result of this arrangement was that the second respondent''s liability to the first respondent was discharged.

The appellant was unaware of this arrangement and until 1929 he was kept in ignorance of the transaction. In 1924 he had been told by the first

respondent''s agent that the trust moneys had been withdrawn from the first respondent and had been taken over by the second respondent, but

nothing was said to arouse his suspicions. When the second respondent was adjudicated an insolvent, the appellant filed an application in the

insolvency proceedings asking that it be declared that the trust moneys constituted a first charge on the assets of the insolvent''s estate in the hands

of the Official Assignee. This application was filed on the 20th February, 1929.

When the second respondent arranged with the first respondent that his overdraft should be paid off by the transfer of the trust funds the second

respondent opened accounts in his own books in the names of the two trusts, making a credit entry in each corresponding to the amount of the

trust fund and debiting the first respondent with the amount. The second respondent set aside no moneys of his own for the purposes of these

trusts, but merely made book entries. He did not even debit himself with the amounts. I will return to this part of the case later. The application of

the appellant for a declaration that the trusts were entitled to the first charge on the second respondent''s assets in the hands of the Official Assignee

was heard by Waller, J., on the 15th October, 1928. The learned Judge dismissed the application on the ground that book adjustments could not

be treated as passing trust moneys into the hands of the Official Assignee. An appeal followed, but was dismissed. Stated broadly, the decision of

the appellate Court was that after the 10th February, 1920, the trust funds consisted of debts owing by the second respondent to the trusts, he

having had the right to invest the trust moneys in his own business. It is not necessary to consider whether this decision is open to objection,

because in the present case the Court is concerned with the question of the liability of the first respondent as a banker.

The present suit was filed on the 29th April, 1933, for a decree for Rs. 49,919-0-2, being the amount of the two trust funds as they stood on

the 10th February, 1920, with interest at the thavanai rate for a period of 12 months. When he instituted the suit the appellant merely claimed a

decree against the first respondent, but as the first respondent pleaded that the second respondent was a necessary party, the second respondent

was added as a defendant on the 24th January, 1934. The second respondent, however, did not appear and the contest remained between the

appellant and the first respondent. The first respondent denied that the trusts had been duly constituted and pleaded that in any event there had

been no breach of trust. He also contended that the suit could not be maintained in view of the provisions of Section 92 of the CPC and of the

Madras Hindu Religious Endowments Act, and raised pleas of estoppel and limitation. All these contentions were decided against the first

respondent, except the contention that there had been no breach of trust: The learned Judge found that the second defendant had full authority to

do what he did on the 10th February, 1920 and therefore the first respondent was not liable as a banker who had knowingly applied trust moneys

to his own debt. Accordingly he dismissed the suit with costs. The appellant contends that as the first respondent took the trust moneys and utilised

them in discharging the debt due to him by the second respondent he is liable to refund them with interest. He also contends that even if the

arrangement between the first and second respondent could in law be regarded as a payment out to the second respondent of the trust moneys he

had no authority to pay them out without the consent of the appellant, the co-trustee of the second respondent. The first respondent has persisted

in the pleas raised by him before the learned trial Judge, except the plea that the Madras Hindu Religious Endowments Act is a bar to the suit.

It is idle for the first respondent to contend that the trusts were not validly constituted. They were constituted under the terms of the partition

deed and moneys were set apart and deposited with the first respondent as thavanai loans. Under Hindu Law all that is required to constitute a

religious or charitable endowment is the intention to endow and the creation of a fund in fulfilment of the intention. Here there was the intention and

the creation.

Before proceeding to discuss the question of the validity of the arrangement of the 10th February, 1920, I will state what I conceive to be the

law. A banker is not entitled to apply| what he knows to be trust funds in discharge or reduction of a debt of a customer. If a banker does so he

can be compelled to make restitution of the moneys so applied. There are many authorities dealing with this question, but it is not necessary to

consider them in detail. The most important cases were considered by Byrne, J., in Coleman v. Bucks and Oxon Union Bank (1897) 2 Ch. 243

where he held that reasonable suspicion puts a banker on inquiry when a benefit to himself is concerned. At page 254 of the report of the judgment

there is this passage:

If bankers have the slightest knowledge or reasonable suspicion that the money is being applied in breach of a trust, and if they are going to derive

a benefit from the transfer and intend and design that they should derive a benefit from it, then I think the bankers would not be entitled to honour

the cheque drawn upon the trust account without some further inquiry into the matter.

If further the inquiry revealed a breach of trust the banker would be doing wrong if he honoured the cheque, and would render himself liable.

In this case it is admitted that the first respondent had full knowledge that the Rs. 15,700 which he transferred to the second respondent''s

account in discharge of his debt on the 10th February, 1920, constituted trust moneys, but stress has been laid on the fact that the second

respondent had the right to invest the trust moneys in his own business and it is said that inasmuch as the second respondent immediately opened

corresponding accounts in his own books, this amounted to an investment in his business. If the transaction did not amount to an investment of the

trust funds in this way the first respondent is liable.

I will here pause to consider a finding of the learned trial Judge that when this transaction was carried through the second respondent was in

affluent circumstances, much having been made of this point. That he was dealing in large sums of money cannot be doubted, and the evidence

does not disclose that at the time he was actually insolvent, but it does not follow that he was in affluent circumstances or that his position was a

sound one. The learned advocate for the first respondent confessed that he was unable to say what the financial position of the second respondent

was at the time. The fact that his banker deliberately applied trust funds in payment of the overdraft which then existed does, however, in itself

indicate that he had no confidence in the financial stability of his customer. But there are other indications that all was not well with the second

respondent''s position and that the first respondent knew this. At this time the first respondent was living at Devakottah and his banking business in

Madras was being carried on by his agent. On the 7th February, 1920, the agent wrote a letter to his principal which would appear to have had

reference to the second respondent''s indebtedness to the first respondent. This letter has not been produced nor has the press copy book kept by

the Madras agent, although all other letters and press copy books have been produced. It would appear that in this letter of the 7th February,

1920, adverse reference was made to the second defendant''s financial position. In addition to the non-production of the letter and the press copy,

there is the fact that on the 17th February, 1920, the first respondent wrote to his agent in Madras saying:

You must not have credit and debit dealings in the current account for large amounts with P.L.N.K S.P. generally.

P.L.N.K.S.P. is the second respondent.

It has been argued that in spite of these facts it must be accepted that the second respondent was in affluent circumstances at the time, because

later he was allowed to overdraw his account to a much larger extent and that his books show that in that year he paid a large amount to

Government by way of Income Tax. The fact that the first respondent allowed the second respondent to overdraw later does not necessarily

indicate that he had confidence in his financial stability. At the most it shows that after the 10th February, 1920, he regained confidence, but a

banker may let a customer whose credit is shaken have advances in respect of particular transactions if he is certain that the business will result in

the money coming back to him. With regard to the payment of Income Tax an examination of the books indicates that the second respondent was

not able to pay at once what was due to Government. The payments made in 1920 comprised ten instalments. In these circumstances we are

unable to agree with the learned Judge that it has been established that the second respondent was in affluent circumstances when the first

respondent utilised the amounts standing in the trust accounts to discharge the second respondent''s overdraft. The evidence points the other way.

Now, what was the effect of the transaction? It resulted in the disappearance of both the trust funds and the second respondent never replaced

these moneys. In answer to a direct question put by the Court to the learned advocate for the first respondent in the course of his argument he

frankly acknowledged that the first respondent knew when he transferred the trust moneys to the private account of the second respondent that the

second respondent intended merely to constitute himself a debtor to the two trusts by making entries in hisown books. In other words, the first

respondent knew that the trust moneys were not to be replaced by cash and that the second respondent was merely intending to acknowledge

liability to, the trusts, and this at a time when the second respondent was unable to pay off his overdraft out of his own moneys. The contention that

this was legitimate because the second respondent had the right to invest the trust moneys in his own business, is, it seems to me, fallacious. There

could be no investment of the trust moneys in the second respondent''s business unless they were replaced. They were not replaced and therefore

there was no investment. The first respondent was not entitled to do what he did without being satisfied that the entries in the second respondent''s

books were going to be supported by cash. He took no steps to satisfy himself that this would be done. On the other hand he applied the trust

moneys for his own benefit knowing full well that the second respondent was merely intending to constitute himself a debtor to the trusts. Moreover

the first respondent was guilty of concealment of the transaction from the appellant who was also his own customer and to his knowledge the co-

trustee of the second respondent. It is admitted that the appellant did not know of the disappearance of the trust fund until he filed the application

for a declaration of a charge in the insolvency proceedings. Until 1924 he thought the moneys were still invested with the first respondent and it

was only when the application to which I have referred came before the Insolvency Judge that he realised that the funds had disappeared

altogether.

In these circumstances it must be held that the first respondent had knowledge that the moneys were being applied in breach of trust, and as

the first respondent derived benefit from the transfer and intended and designed that he should derive a benefit from the transfer the case falls within

the rule stated by Byrne, J., in Coleman v. Bucks and Oxon Union Bank (1897) 2 Ch. 243. Even if he had not got the knowledge he knew

sufficient to be put on enquiry, which would also bring him within the rule. Holding this view the second contention advanced on behalf of the

appellant, namely, that the first respondent could not deal with the trust funds without the Consent of the appellant does not require to be decided,

but in passing I may observe that it is difficult to see how the first respondent could be held liable on this ground. The second respondent was

admittedly the managing trustee and he had invested the trust funds with the first respondent.

It only remains to consider the contentions of the first respondent that the suit fails by reason of the doctrine of estoppel, the law of limitation

and the provisions of Section 92 of the Code of Civil Procedure. The contention with regard to estoppel is based on the doctrine of election and it

is this. It is said that, inasmuch as the appellant filed an application for a declaration of charge in the Insolvency Court and there failed, he cannot

now turn round and seek to make the first respondent liable. There is here a misconception of the position and the law. When that application was

filed, the appellant was under the impression that the first respondent had paid out the trust moneys to the second respondent and that they had

been invested in the second respondent''s business. This was not the case, and the appellant having realised as the result of the proceedings in the

Insolvency Court that the trust funds had been applied by the first respondent for his own purpose he filed the present suit. The doctrine of election

can have no application here. The cause of action was different and the suit was filed in order to establish the liability of the first respondent. It is

true that the second respondent was added as a party as the result of the attitude of the first respondent, but again the cause of action against the

second respondent in this suit is a different one. It is now sought to make him liable for a breach of trust. There was no question of breach of trust

in the previous proceedings.

In view of the Full Bench decision of this Court in A.N.C.T. Subbiah Thevar, Trustee of Sree Vedapuriswaraswami Koil and Others Vs. N.R.

Samiappa Mudaliar and Others, , it is accepted that the article of the Limitation Act which applies is Article 120. That article states that limitation

shall start to run when the right to sue accrues, and as the cause of action arose when the trust funds were transferred to the first respondent on the

10th February, 1920, the right to sue accrued on that date. It has been held by this Court and other High Courts in India that, where a trustee is

kept in ignorance of a breach of trust, the fight to sue does not accrue until the trustee becomes aware of the fact. Basavayya v. Bapanna Rao

Sowcar (1929) 58 M.L.J. 349 Tirumal Rao v. Tungamma Shettithi (1914) 1 L.W. 134 Muruga Chetty v. Rajaswamy (1915) 29 M.L.J. 574

Venkateswara Aiyar v. Somasundaram Chettiar (1917) 7 L.W. 280 Peruri Viswanadham v. Pendela Narayana Doss (1928) 28 L.W. 224 Lal

Singh v. Jai Chand I.L.R.(1930) 12 Lah. 262 and Mathura Singh v. Rama Rudra Prasad Sinhas I.L.R.(1935) 14 Pat. 824 There are two

decisions of this Court which tend the other way. Ottapurakkal Thazhate Soopi v. Cherichil Pallikkal Uppathumma I.L.R.(1909) 33 Mad. 31 and

C. Prasanna Venkatachella Reddiar v. The Collector of Trichinopoly I.L.R.(1914) 38 Mad. 1064, but the weight of authority is in favour of the

view that knowledge is a factor. The appellant had no knowledge of this breach of trust until 1929 and this is not disputed. There can be no doubt

that the true position was concealed from him until 1929 and as the suit was filed in 1933 it was filed in time.

The argument which is based on the provisions of Section 92 of the CPC is that, as the appellant asked the first respondent to account for the

trust moneys in his hands, it was a suit for the taking of accounts of a trust and therefore falls within the purview of the Section 92. It is clear that

this suit was not a suit for an account in that sense. It was a suit against a banker to recover trust moneys which he has misapplied. In Shanmukham

Chetty v. Govinda Chetty (1937) 46 L.W. 426 a bench of this Court of which I was a member held that a suit by trustees against co-trustees for

accounts does not come within the provisions of Section 92 and may be instituted without the sanction of the Advocate-General. This contention

must also be overruled.

My learned brother concurs in this judgment and the appeal will, therefore, be allowed with costs in both the Courts. There will be a decree

against first respondent for the sum of Rs. 15,700 with interest from the 10th February, 1920, to the date of this judgment at the thavanai rates and

annual rests which was agreed upon when the moneys were deposited by the second respondent with the first respondent and interest at 6

percent, will be payable on the decretal amount from the date of judgment. The advocate''s costs will be on the higher scale of one and one-third

of the regulation fee both here and below.