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. However the list is by no means
exhaustive.
A. Trust Accounts
Where a customer deposits money with the bank a debtor-creator relationship is established
under which the bank acquires the beneficial title to the funds. The bank is entitled to use the
funds in any manner it deems fit. The customer does not acquire any interest or charge over
the banks general assets and the deposit account is merely an acknowledgement and record
of the credit balance standing to customers account. Where, 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 authorizes 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.

B. Special Purpose: The Quist close Trust

When 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 House of Lords in the case of Barclays Bank Ltd. v. Quist close
Investments Ltd. 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
cheque was paid into a special account with B bank that was created specifically for this
purpose. When the company went into voluntary liquidation before this dividend was paid,
the question with which the court was posed with was whether the investment company had
the equitable 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 equity if A pays money to B upon the terms
which are accepted by it that the money will be applied for a specific purpose, B is subject to
an obligation to apply the money only for that purpose and cannot himself assert a beneficial
title to it and the money is subject to a trust of which B is a trustee. The House of Lords ruled
in the favour of the investment company and noted that the money was never intended to
form part of companys 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. A 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 Hume Pipe Co. v. T N & Q Bank the company had a current account
with the Travancore bank at Nagarcoil. Company had no account with the Bombay branch.
The company had instructed the Bombay branch of the bank to collect a cheque in its favour
drawn on Indian National Bank, Bombay and to remit the proceeds to Nagarcoil branch to the
credit of the company. Before such transfer bank went into liquidation and the funds
remained with the Bombay branch. It was held by the court that the bank was holding his
principals money for special purpose. The company was held entitled to amount of the

cheque. While delivering the judgement the honble court placed reliance upon an English
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.
D. Constructive Trustee
Under this head liability of bank shall be discussed when it acts as an agent of the person who
has committed breach of the trust. As the principle evolved through the case
of Barnes v. Addy, 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. Noteworthy are the observations made by Lord Selborne which
are chanted by every scholar confronting this subject 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 equity 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.
Knowing Receipt
The elements that are necessary for liability to be imposed under the knowing receipt head
are as follows:

There must be a trust or fiduciary relationship

There must be a misapplication of trust money by the trustee or fiduciary;
There must be a transfer of moneys to the bank , the bank must receive the misapplied
money for its own benefit; and fourth, the bank must have the requisite degree of
knowledge such that it acts with want of probity.

For liability under this head, all that is required is a civil misapplication. The bank must
receive funds which have been misapplied, with knowledge that they have been misapplied.
Here 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

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 De Son Tort
Although a bank is a stranger to the trust, it may take upon itself the responsibility to act on
behalf of beneficiary. Such 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.
Here the strangers conduct is equated to the declaration of himself as trustee. The case
of Blyth v. Fladgate 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.
After 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. A person who assumes to act as trustee will be subject to all
the liabilities of an expressly appointed trustee. He will therefore be liable to make good any
loss resulting from his unauthorized conduct.
Statutory Trustee
Section 6 of the Banking Regulations Act, 1949 authorizes the bank to act as trustee as a part
of its banking function. However 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 Co Ltd 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.
As general rule, trustee if earns profit by using the trust funds, it has to account for it.
However, 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 Canera Bank v. NTPC serves as a good illustration where the bank is acting as an
agent under s.6 of the Banking Regulation Act. Reiterating what has already been mentioned

in the preceding sections, it was held that the bank cannot mix the funds/proceeds of the trust
with that of its own.
Conclusion
Mere 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.
With respect to trust accounts not only the actual notice but even constructive notice would
suffice to hold banks liable as a trustee. However, 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. A 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. Sometimes, 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 realized 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 trustee
or a debtor.
With 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 dishonest and
that of knowledge. Even in the cases of knowing receipt the term beneficial receipt is
presently interpreted without having regard to banking practices. Hence need exists for
reform. As per section 6 of Banking Regulation Act, banks can perform the functions of
trustee with a higher standard of care than what normally exists for others. Also, the amounts
forwarded by the subscribers, under various provisions of Companies Act make the bank a
statutory trustee.