The Official Assignee of Madras vs The Devakottah Nagarathar Sri Meenakshi Vidyasala Paripalana Sangam

Anantakrishna Aiyar, J.—M.A.R.N. Ramanathan Chettiar, a Nattukottai Chetty, who was carrying on money-lending transaction under the

firm''s name of M.A.R.N. Ramanathan Chettiar, was a member of the Committee of the Naga-rathar Sri Meenakshi Vidyasala Paripalana Sangam

and also the treasurer of the Sangam. The Sangam is compendiously called ""The Nagarathar School, Devakottah."" In his capacity as treasurer,

Ramanathan Chettiar collected various sums subscribed for the school which the Sangam was maintaining. He paid these sums into his own

business, and in 1925 the firm was adjudicated insolvent. At that time there stood to the credit of the trust in his firm''s books a sum of over Rs.

40,000. The committee of the Nagarathar School, Devakottah, claimed that the said amount should be paid in full by the Official Assignee in

preference to the other debts due to other ordinary creditors of the firm. The Official Assignee passed an order on 25th May, 1927 to the effect

that the relationship between the Nagarathar School, Devakottah, and the insolvent was that of a debtor and creditor and no more. The Official

Assignee went further and held that

even assuming for the purpose that the insolvent was in a fiduciary relationship and that he acted improperly in investing the moneys of the school in

his firm, the same could not he identified or earmarked. When the firm was adjudicated insolvent there was no cash and no part of the assets could

be followed by the beneficiary.

The Official Assignee accordingly held that the School authorities were in no better position than the other unsecured creditors of the insolvent

and that they could not claim any preferential payment.

The School authorities appealed to the learned judge sitting in Insolvency against the order of the Official Assignee. The learned Judge (Mr.

Justice Waller) allowed the appeal and gave the School authorities a first charge, for the full amount of their claim, on the realisation of the debts

due to the linn of the insolvent.

The Official Assignee has preferred this appeal against the order of the learned Judge and contends that the School authorities are not entitled to

rank higher than the ordinary unsecured creditors of the insolvent.

Before discussing the question of law raised by Mr. S. Duraiswami Aiyar, the earned Counsel for the appellant, I think it is better just to refer to

the finding of fact arrived at by the learned Judge. In the course of the judgment the learned Judge has recorded the following admission made

before him by the counsel who appeared for the Official Assignee:

Air. S. Duraiswami Aiyar for the Official Assignee concedes that he is unable to support the view that the relation between the insolvent and the

trust was one of debtor and creditor. He admits that Ramanathan Chetty was a trustee and received the trust funds as a trustee and mixed it with

the funds of his own business.

As a trustee of the Nagarathar School the insolvent was entirely in the wrong in utilising the trust funds in connection with his own business. As

the learned Judge remarks

there can be no question as to the wrongful nature of Ramanathan Chetty''s action, for the mingling itself was wrongful.

The question then is whether beneficiary (the school) is entitled to a first charge on the trade assets of Ramanathan Chetty''s firm. Section 66 of

the Indian Trusts Act (II of 1882) enacts as follows:

Where the trustee wrongfully mingles the trust property with his own, the beneficiary is entitled to a charge on the whole fund for the amount due to

him.

The earned Counsel for the appellant contends that the beneficiary is entitled to a charge for the trust money only if he can trace it to a specific

fund. The trust funds have been admittedly utilised by the insolvent in connection with his money-lending business. It is not now possible to say

which particular asset due to the firm represents the trust moneys. In these circumstances it is argued for the Official Assignee that the beneficiary is

entitled only to rank as an ordinary creditor along with the other creditors of the insolvent. In support of his contention the earned Counsel strongly

relied on In re Hallett & Company. Ex parte Blane (1894) 2 Q.B. 237. The following passage on page 244 in the judgment of Lord Justice Lopes

was relied upon:

If trust money can be traced, it is liable to be followed by the trustee, and will not pass to the trustee in bankruptcy; but if it has been mixed up with

other money so as not to be distinguishable, it cannot be followed.

This case, however, has been understood by text-writers as authority for the proposition ""that in the case of money"" there must be in fact a

payment, since ""the doctrine of following"" depends upon identification of the subject-matter; and where money not actually received was credited

to an account, the doctrine was held inapplicable.--Godefroi on Trusts and Trustees, 4th Edition, pages 564 and 565.

In Lewin on Trusts, 12th Edition, page 1155 it is stated as follows:

In order, however, that the rule as to following trust money should apply, there must be something specific which is capable of being identified as

that into which the money has been converted, and where a transaction has been carried out by a set-off in account so that no cheque, note, coin

or credit has ever passed or existed in specie, the doctrine is inapplicable.

Turning to the judgment delivered in In re Hallett & Company''s case (1894) 2 Q.B. 237. we find that Lord Esher (Master of Rolls) says at

page 244:

Hallett & Company did not in truth receive any money; they entered into a transaction with Hewitt and Company, the result of which was that no

money passed.. . Hallett & Company did not in fact receive any money or tender of money or anything tangible which it would be possible to

follow or to lay hands upon. .. All that can be shewn is a settlement of account, and a settlement of account cannot be followed.

Similarly Lopes, L.J., says:

So far as regards the following of this sum of 1,600., the attempt fails at the first stage, for that particular 1,600/. was never received by Hallett and

Company; no money had passed; there had been a mere settlement with Hewitt & Company. Then, again, this specific sum never passed on to

Cocks, Biddulph and Company; and the second stage fails too.

Similarly at page 245 Davey, L.J., also makes similar remarks:

This money was not received by them (Hallelt and Company) in any sense which is material to the present purpose. Nothing was received by them

in specie, notes, cheques or coin; there was no credit existing in specie, nothing which the ceshui que trust could follow and say that the property

had been converted into.

Therefore, the case in In re, Hallett and Co. Ex parte Blane (1894) 2 Q.B. 237 could be distinguished on the ground that in that case it was

found that the very first step that the beneficiary should prove in such cases, namely, that the trustee received moneys of the beneficiary, was not

proved. On the other hand authority seems to be fairly clear that where a trustee wrongfully mingles the trust property with his own, the beneficiary

is entitled to a charge on the whole fund for the amount due to him.--See Section 66 of the Indian Trusts Act, Halsbury''s Laws of England, Vol.

28, page 207, Sections 415 and 416.

It was admitted that where trust money is wrongfully laid out in the purchase of specific real or personal property, the beneficiary can elect to

have a charge upon it for the amount of the trust money.--Sec authorities referred to in paragraph 415 of Halsbury''s Laws of England, Vol. 28.

If therefore the trustee in this case had purchased a going concern of another, with the trust funds, then the beneficiary would have an option either

to take the purchased property or elect to have a charge upon it for the amount of the trust money. If, instead of purchasing a going concern, the

trustee wrongfully utilises the trust money for starting business, or for carrying on a business of his own, then it would seem that the beneficiary is

entitled equally to elect to have a charge upon the assets of the business for the amount of the trust money.

It was, however, contended by the earned Counsel for the appellant that the doctrine of following trust property is not applied, and could not

in the nature of things apply, when the trust funds are wrongfully applied by the trustee in a trade or business. If the doctrine is not confined in its

application to cases of mingling of trust moneys with the trustee''s own money where there is a mingled fund available, if the doctrine also applies to

cases where with the money of the beneficiary the trustee wrongfully buys other property, and if the beneficiary could in such cases claim to have a

charge on such property to the extent of the trust money utilised wrongfully by the trustee, I am not clear why the doctrine should not apply when

the trustee instead of utilising the trust money for the purchase of property utilised it in a trade or business of his own. Having regard to the findings

in the present case and to the admission made on the Official Assignee''s behalf, as recorded by the learned Judge, there is no difficulty as regards

facts in the present case; for, as already mentioned, it was admitted before the learned Judge on behalf of the Official Assignee that

Ramanathan Chetty was a trustee and received the trust fund as a trustee and mixed it with the funds of his own business.

The earned Counsel for the respondent cited to us the case of Pennell v. Deffell (1853) 4 De G.M. & G. 372 : 43 E.R. 551. Lord Justice

Turner observed as follows:

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; and from this principle I do not understand the Master of the Rolls to have in any degree dissented. Several cases illustrating the principle

were cited in the argument, but perhaps it cannot be better illustrated than by referring to a case of familiar, almost daily occurrence, the case of

trust-monies employed in trade. An executor of a deceased partner continues his capital in the trade with the concurrence of the surviving partners,

and carries on the trade with them. The very capital itself may consist only of the balance which at the death of the partner, was due to him on the

result of the partnership account. That capital may have no existence but in the stock-in-trade and debts of the partnership. The stock-in-trade and

debts may undergo a continual course of change and fluctuation, and yet this Court follows the trust capital throughout all its ramifications, and

gives to the beneficiaries of the deceased partner''s estate the fruits derived from that capital, so continually altered and changed. We have here, I

think, the most perfect instance of the extent to which the doctrine of following trust property has been carried by the Court, an instance, too,

which exemplifies the difficulties with which the Court has felt bound to grapple for the purpose of carrying out that doctrine, for nothing can be

more difficult, nothing more inconvenient, than to follow out such a case to its results.

We are also referred to In re Hallett''s Estate. Knatchbull v. Hallett (1870) 13 Ch.D. 696 to the judgment of Jessel (Master of the Rolls) at

page 707 el seq. The decision of the House of Lords in Sinclair v. Brougham (1914) A.C. 398 was also referred to and several passages from the

speeches of the learned Lords who took part in that case were read to us. For example, at page 438 in Lord Dunedin''s speech the following

passage occurs:

Now, there are certain situations, of which Hallett''s case (1914) A.C. 398 is an example, where the one sharing party has a right to say to the

other, It is not in your mouth to say that the assets are not all mine, to the extent of my'' full claim. I do not think this is one of those positions.

Neither party is here in any fiduciary position to the other.

Similarly passages at page 418 in the speech of the Lord Chancellor (Viscount Haldane) were also read to us.

I think that some of the passages occurring in the above case could he construed as laying down the principle contended for by the respondent,

though it may be said that the point for decision before the House was quite a different one and that the learned Lords were not considering the

exact point now before the Court.

In Perry on Trusts, 6lh Edition, Vol. II, paragraph 828, page 1364, it is said that

to entitle the trust creditor to preference, it must at least appear that the funds remaining for distribution contains the proceeds of the trust.

Again in paragraph 838 it is mentioned that

if the executor of a deceased partner is also the surviving partner and he continues the deceased partner''s capital without authority in the business.

and changes the property many times over, the Court follows the trust fund through all these changes and gives the beneficiaries of the deceased

partner''s estate the capital and all its proceeds or gains in the business in which it has been employed.

The only Indian case, I am aware of, which is somewhat similar to the present case, is Mulrasu Lakshmi v. Official Assignee of Madras (1915)

29 I.C. 37 decided by Sadasiva Aiyar and Napier, JJ., where a jeweller, who was entrusted by the claimant with sovereigns and gold to be made

into a jewel for him, converted the same into cash and subsequently became bankrupt, and after the Official Assignee took charge of his estate, the

owner of the sovereigns and gold put forward a claim that he was entitled to a preferential treatment and to get out of the estate the full value of the

sovereigns and gold entrusted by him to the bankrupt, the Court held that the transaction between the claimant and the jeweller amounted to a

bailment and the jeweller became, in consequence, a trustee for the claimant in respect of the sovereigns and gold entrusted to him. But as there

was no evidence, in that case, that the sovereigns and gold formed a portion of the estate taken possession of by the Official Assignee and as there

was nothing to identify the same, the Court held that the claimant was not entitled to the benefit of the doctrines of tracing and quasi-charge, and

therefore to any preferential payment.

Justice Sadasiva Aiyar at page 41 says:

If, in this case, I could have found my way to decide that the assets taken possession of by the Receiver or by the Official Assignee did include or

must have included the gold or the value of the gold contained in the sovereigns and the bar given by the petitioner to the insolvent, I would be

inclined to apply the doctrine of tracing and the doctrine of quasi-charge even to the full limits indicated by Lord Dunedin in his judgment in the

recent House of Lords'' case; but 1 do not: see my way to differ from the finding of Mr. Justice Bakewell that the petitioner has failed to show that

the gold or the price of that gold was invested in or formed part of any of the assets taken possession of by the Receiver or by the Official

Assignee.

Again the learned Judge adds:

On the finding, then, that none of the assets found with the insolvent is proved directly or even by a remote fact, from which a reasonable inference

could be drawn, to have contained any portion of the petitioner''s gold or to have been acquired with the use of the proceeds of that gold, I must

and do confirm the order of the learned Judge.

The principle would seem to be that a wrong-doer cannot be permitted to take advantage of his wrong and that no wrongful act of the trustee

could prejudice the rights of the bene-ficiaries in cases like the present.

I am therefore of opinion that the learned Judge was right in holding that the principle of following trust property applies to the facts and

circumstances of the present case. I would therefore dismiss the appeal with costs. Costs to be realised from the Estate. Certificate for two

counsel. The Official Assignee is entitled to take his costs out of the Estate.