Internal Assignment

of
Trust Equity & Fiduciary Relationship

On

“Liabilities of Trustee”

Submitted To; Submitted By;

Priya Chanana Yash Kedia
Assistant Professor Student ID – 18FLICDDN02179
ICFAI Law School BA-LL.B. (H.) III Year,
The ICFAI University, Dehradun Section- “C”

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 TABLE OF CONTENTS

Particulars Page No.

Acknowledgement 3

Introduction 4-5

Section 23 5-8

Section 24 9

Section 25 9

Section 26 9 - 10

Section 27 10 - 11

Section 28 11

Section 29 11

Section 30 12

Liability to third parties 12 - 13

Conclusion 13

Bibliography 14

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 ACKNOLEDGEMENT

I would like to express my special appreciation and thanks to my adviser

Assistant Professor Priya Chanana, you have been a tremendous mentor
for me. I would like to thank you for encouraging me for completion of my
project. Your advice on the research of my project have been invaluable. A
special thanks to my family and Friends. Words cannot express how
grateful I am to my parents for all of the sacrifices that they’ve made on
my behalf and support of my Friends is also commendable from my side.
Your prayer for me was what made me able to complete my project on
time. Thank you for supporting me for everything.
Finally, I thank my God, my good Father, for letting me through all the
difficulties. I have experienced Your guidance day by day. I will keep on
trusting You for my future. Thank you, Lord.

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Introduction: -

The Indian Trust Act, 1882 is an enactment in India correlated to separate guardians and
custodians. The act describes what would legally be designated as a Trust and who can be
authorized as its trustee and provides the explanation for them. A trust is a commitment
attached to the possession of premises and emerging out of reliance in and admitting by the
owner for the interest of another.

A trustee is a person who accepts the confidence and the person for whose advantage the
admitted is called the Beneficiary.

It is a common misconception that an independent trustee’s liability is limited to the assets of

the trust regardless of the circumstance in which liability arises. However, this is not the case.
Trustees act personally. This means that a trustee is personally liable for any debt incurred
when acting as a trustee, regardless of whether the trustee can benefit personally from the
trust. There is no special status at law that attaches to acting as a trustee such that personal
liability can be avoided. Although it is common for a modern deed of trust to include a clause
limiting the trustee’s liability to the assets of the trust, what many trustees fail to appreciate is
that this limitation of liability applies between the trustee and the beneficiaries, not between
the trustee and the world at large. This means that if a trustee contracts with a third party, for
example a bank, the trustee must ensure that the terms of that contract limit the trustee’s
liability as the limitation of liability in the deed of trust is not binding on third parties such as
the trust’s bankers.

Any limitation of liability must be expressly stated. Simply entering into a contract or
agreement as a trustee is generally insufficient to ensure limitation of liability. This
proposition was confirmed in the recent decision in Williamson v Bennet where a trustee
who failed to complete a property purchase entered into on behalf of a trust was found to be
personally liable for the subsequent loss on sale. While accepting that the trustee had entered
into the agreement on behalf of the trust, the judge hearing the matter re-stated the fact that a
trustee is personally liable unless liability is excluded by the terms of the agreement.

Although the most recent ADLS standard agreement for sale and purchase provides that the
liability of any independent trustee can be limited to the assets of the trust, there will be no
implied limitation if a different form of agreement for sale and purchase is used.

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Liabilities of a Trustee : -

The most significant features of a trustee’s obligations are its legal guardian persona. A
Trustee is legitimately and substantially secured to administer the trust assets in a reliable and
prolific method and is beneath an imperative commitment to act completely for the interest of
the Trust’s pensioners. Trustees are legally bound to accompany the terms of the organization
and are answerable to the successors for their operations. They may be endured individually
accountable if they are discovered to be dealing on their own terms and conditions without
following the code of conduct of the respective Trusts or exercising the trust property for
their personal interest. A trustee handles resources which are retained in the organization. A
Trustee is a grouping in which one personage contains the premises of different for the
advantage of a third individual called as Heir. The beneficiary is ordinarily the proprietor of
the premises or a person assigned as the recipient by the proprietor of the premises.

There are certain sections and provisions under the Indian Trust Act 1882, which describes
the liabilities of a trustee, they are as follows: -

Section: - 23: -
Liability for breach of Trust: -
Where the trustee commits a breach of trust, he is liable to make good the loss which the
trust-property or the beneficiary has thereby sustained, unless the beneficiary has by fraud
induced the trustee to commit the breach, or the beneficiary, being competent to contract, has
himself, without coercion or undue influence having been brought to bear on him, concurred
in the breach, or subsequently acquiesced therein, with full knowledge of the facts of the case
and of his rights as against the trustee.

A trustee committing a breach of trust is not liable to pay interest except in the following
cases:—

a) where he has actually received interest;

b) where the breach consists in unreasonable delay in paying trust-money to the beneficiary;

c) where the trustee ought to have received interest, but has not done so;

d) where he may be fairly presumed to have received interest;

He is liable, in case (a), to account for the interest actually received, and, in cases (b), (c) and

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(d), to account for simple interest at the rate of six per cent. per annum, unless the Court
otherwise directs.

e) where the breach consists in failure to invest trust-money and to accumulate the interest
or dividends thereon, he is liable to account for compound interest (with half-yearly rests)
at the same rate;

f) where the breach consists in the employment of trust-property or the proceeds thereof in
trade or business, he is liable to account, at the option of the beneficiary, either for
compound interest (with half-yearly rests) at the same rate, or for the net profits made by
such employment.

Illustrations: -

I. A trustee improperly leaves trust-property outstanding, and it is consequently lost: he is

liable to make good the property lost, but he is not liable to pay interest thereon.

II. A bequeaths a house to B in trust to sell it and pay the proceeds to C. B neglects to sell
the house for a great length of time, whereby the house is deteriorated and its market-
price falls. B is answerable to C for the loss.

III. A trustee is guilty of unreasonable delay in investing trust-money in accordance with

section 20, or in paying it to the beneficiary. The trustee is liable to pay interest thereon
for the period of the delay.

IV. The duty of the trustee is to invest trust-money in any of the securities mentioned in
section 20, clause (a), (b), (c) or (d). Instead of so doing, he retains the money in his
hands. He is liable, at the option of the beneficiary, to be charged either with the amount
of the principal money and interest, or with the amount of such securities as he might
have purchased with the trust money when the investment should have been made, and
the intermediate dividends and interest thereon.

V. The instrument of trust directs the trustee to invest trust-money either in any of such
securities or on mortgage of immovable property. The trustee does neither. He is liable
for the principal money and interest.

VI. The instrument of trust directs the trustee to invest trust-money in any of such securities
and to accumulate the dividends thereon. The trustee disregards the direction. He is liable,

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 at the option of the beneficiary, to be charged either with the amount of the principal
money and compound interest, or with the amount of such securities as he might have
purchased with the trust money when the investment should have been made, together
with the amount of the accumulation which would have arisen from a proper investment
of the intermediate dividends.

VII. Trust-property is invested in one of the securities mentioned in section 20, clause (a), (b),
(c) or (d). The trustee sells such security for some purpose not authorised by the terms of
the instrument of trust. He is liable, at the option of the beneficiary, either to replace the
security with the intermediate dividends and interest thereon, or to account for the
proceeds of the sale with interest thereon.

Explanation: -

1. Breach of Trust: -
A breach of trust is a situation where a trustee is failing to do something which is required in
the trust.
The Keeton defined it in following points,
 Some improper act
 Neglect
 Default
 Omission: - In respect of trust property or beneficiary interest.

2. Value of liability: -
The liability is measured for breach if the loss is caused to the owner or to the beneficiary, the
trustee is liable to pay the compensation with interest.
A Trustee committing a breach of Trust is not liable to pay interest except in the following
cases: -
 Where he has actually received the interest.
 Where he has delayed payment to the beneficiary
 Where he ought to have received interest but has not done so .
 Where he fails to invest trust money
 Where he may fairly presume to have received it
 Where he employees the trust property in trade or business.

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In all the above cases the trustee is liable to pay the loss to the trust property along with the
interest @ of 6%.

In case of Hukuchand Gulabchand Jain v. Fulchand Lakhmichand Jain, AIR 1965, SC

1692, it was held that, A Trustee is not liable to pay Compound Interest if there is no
allegation in the plaint that trustee used funds of the trust in his business, but, A Trustee is
liable to pay simple interest generally @ of 4% if he retains trust money in his own hands
uninvested.

Breach of trust means a breach of any duty imposed on a trustee, by any law for the time
being in force. It includes the violation of any direction given in the trust-deed. The trustee is
liable to make good the loss sustained by the beneficiary or the trust property, due to breach
committed by the trustee.

This is subject to certain exceptions: -

1.Fraud by beneficiary or notification by him of a breach with full knowledge thereof.

2. Trustee is liable to pay interest, in the following:

a) When he has actually received interest, but has not accounted for.

b) Where he ought to have received, but has failed to collect,

c) Where he causes unreasonable delay in paying to the beneficiary.

d) The rates of interest must be as per the trusts Act. He must pay actual interest received in
(a) and pay simple interest in (b) & (c) above. But, he must pay compound interest if a
breach committed by him in not investing in the moneys as per the Trust Act or in not
using in trade or business as required under the trust deed.

1. A trustee allows trust property in the hands of X, improperly for a long time and is lost. A
is liable to make good the loss, but he is not liable to pay interest.

2. A, a trustee keeps trust money for one year without making investment in securities. He is
liable to pay interest.

3. A, a trustee is directed to invest in mortgage of immovable property. A fails. He is liable

for trust money and interest.

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Section - 24: -
No set-off allowed to the trustee: -
A trustee who is liable for a loss occasioned by a breach of trust in respect of one portion of
the trust-property cannot set-off against his liability a gain which has accrued to another
portion of the trust-property through another and distinct breach of trust.
It means that,
Where there are more than one transaction and one result in loss and gained in another so the
trustee cannot be allowed to settle the loss against the gain obtained. If the gain and loss both
are in one transaction then, the same transaction can be adjusted.

Section - 25: -
Non-liability for predecessor’s default: -
Where a trustee succeeds another, he is not, as such, liable for the acts or defaults of his
predecessor.
It means that,
When a trustee succeeding another is not liable for the act or default for his predecessor.

Section - 26: -
Non-liability for cp-trustee’s default: -
Subject to the provisions of sections 13 and 15, one trustee is not, as such, liable for a breach
of trust committed by his co -trustee:
Provided that, in the absence of an express declaration to the contrary in the instrument of
trust, trustee is so liable—

a) where he has delivered trust-property to his co-trustee without seeing to its proper
application;

b) where he allows his co-trustee to receive trust-property and fails to make due enquiry as
to the co-trustee’s dealings therewith, or allows him to retain it longer than the
circumstances of the case reasonably require;

c) where he becomes aware of a breach of trust committed or intended by his co-trustee,

and either actively conceals it or does not within a reasonable time take proper steps to
protect the beneficiary’s interest.

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Joining in receipt for conformity: - A co-trustee who joins in signing a receipt for trust
property and proves that he has not received the same is not answerable, by reason of such
signature only, for loss or misapplication of the property by his co -trustee.

Illustration: -

A bequeaths certain property to B and C, and directs . ahem to sell it and invest the proceeds
for the benefit of D. B and C accordingly sell the property, and the purchase-money is
received by B and retained in his hands. C pays no attention to the matter for two years and
then calls on B to make the investment. B is unable to do so, becomes insolvent, and the
purchase-money is lost. C may be compelled to make good the amount.

It means that,
One trustee is not liable as such, for a breach of trust committed by his co-trustee, but this
non liability is there only when he behaves in accordance with the provision of Sec 13 and 15.
Section 13: -
Talks about trustee to protect the trust property
Section 15: -
Talks about care required from trustee.
If there is no express declaration about such liability in the instrument of trust. The trustee is
so liable for the act of his co-trustee’s default.
Those Cases are as follows: -
1. Where he delivers property to co-trustee without seeing to its proper application.
2. Where he allows his co-trustee to receive the trust property but he fails to inquire into the
dealing made by the co-trustee.
3. Where he allows him to retain it for a period longer than required.
4. Where actively conceal or does not make proper steps to protect a tryst property from his
co-trustee.

Section - 27: -
Several liability of co-trustee: -
Where co-trustees jointly commit a breach of trust, or where one of them by his neglect
enables the other to commit a breach of trust, each is liable to the beneficiary for the whole of
the loss occasioned by such breach.

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Contribution as between co-trustees: -

But as between the trustees themselves, if one be less guilty than another and has had to
refund the loss, the former may compel the latter, or his legal representative to the extent of
the assets he has received, to make good such loss; and if all be equally guilty, any one or
more of the trustees who has had to refund the loss may compel the others to contribute.
Nothing in this section shall be deemed to authorize a trustee who has been guilty of fraud to
institute a suit to compel contribution.

It means that,
Any breach of trust or loss committed by co-trustee jointly or by any one of them so each one
is liable to the beneficiary for the losses occurred.

Section - 28: -
Non-liability of trustee paying without notice of transfer by beneficiary: -
When any beneficiary’s interest becomes vested in another person, and the trustee, not having
notice of the vesting, pays or delivers trust-property to the person who would have been
entitled thereto in the absence of such vesting, the trustee is not liable for the property so paid
or delivered.
It means that,
In a situation where beneficiary's interest becomes vested to someone else\some other person
and the notice of the vesting interest has not been served in the circumstances, the trustee is
not liable for the property so paid or delivered.

Section - 29: -
Liability of trustee where beneficiary’s interest is forfeited to the government: -
When the beneficiary’s interest is forfeited or awarded by legal adjudication 1 [to the
Government], the trustee is bound to hold the trust-property to the extent of such interest for
the benefit of such person in such manner as 2 [the State Government] may direct in this
behalf.
It means that,
This Section Creates one more liability of a Trustee to hold the trust property for the benefit
of the person directed by the State Government in the case of forfeiture of the beneficiaries
interest.

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Section - 30: -
Indemnity of trustees: -
Subject to the provisions of the instrument of trust and of sections 23 and 26, trustees shall be
respectively chargeable only for such moneys, stocks, funds and securities as they
respectively actually receive, and shall not be answerable the one for the other of them, nor
for any banker, broker or other person in whose hands any trust property may be placed, nor
for the insufficiency or deficiency of any stocks, funds or securities, nor otherwise for
involuntary losses.
It means that,
This section limits the liability of trustee to such money, stock, funds and securities as they
actually receive but they shall not be answerable for the acts of the banker, broker or any
person in whose hand the trust property is placed where matter related to insufficiency or
deficiency in any stock, fund securities and for involuntary losses.

A trustee’s personal liability is tempered, at least in part, by the trustee’s statutory right of
indemnity (Trustee Act 1956, S - 38(2)). By virtue of this right of indemnity a trustee can
recoup expenses reasonably incurred in the proper running of the trust. This right of
indemnity ranks ahead of any interest a beneficiary has in a trust fund.

However, where the trust’s assets are inadequate the value of any indemnity may be illusory
where the trustee must still discharge any personal liability.

Liability to third parties: -

A trust is a legal arrangement, and not a legal entity. While the trustee must deal with the
trust assets for the benefit of the beneficiaries, contracts made in connection with the trust
will be made in the trustee's name, not in the name of the trust. The trustee does have a right
of indemnity from the trust fund in respect of most liabilities incurred in respect of the trust,
but this is clearly limited to the level of the assets in the trust fund.

This means that if the trustee enters into a contract with a third party relating to trust business
(an option arrangement, for example, or a loan) that third party will be able to claim against
the trustee personally under the contract. While the trustee has a right of indemnity, this is
limited to the assets within the fund at the time of the claim. Any shortfall will have to be met
from the trustee's own pocket. Trustees should be alert to this and when contracting with third

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parties should notify the third party of the existence of the trust and seek expressly to limit
their liability to the level of assets in the trust fund from time to time. Trustees must realise
that the value of the trust fund may fluctuate as the value of investments changes.

Conclusion: -

In this Article, I have discussed all the aspects of the Liabilities of a Trustee. This assignment
covers the entire topic of “Liabilities Of The Trustee’’ given under Indian Trusts Act, 1882.
This has covered an entire chapter of the Indian Trusts Act and has helped to get the pros or
cons of every system prevailing as it is a known fact that every coin has two sides. This
present pertaining project has helped me to get over all the doubts that were initially over in
the particular topic and has helped to get a command over this.

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 Bibliography
1) The Indian Trust Act, 1882, (Bare Act)

2) Notes provided by the Faculty

3) Principles of Equity with Trusts & Specific Relief, Dr. M.P. Tandon, 16th Edition

4) https://www.marsh.com/nz/services/financial-professional-liability/trustees-
liability.html

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