As the topic of my topic suggests I have majorly talked about the duties of a trustee in terms of Indian Trusts Act 1882. However before diving deep into I have discussed briefly about the standards applicable to a trustee. Hence I have categorized various duties of a trustee in terms of sections 11-22 as mentioned in the Indian Trusts Act 1882.
STANDARDS APPLICABLE TO TRUSTEES
At this juncture a distinction must be made between duties of trustees and their power or discretions. A Duty is an obligation which must be carried out; there is no option, it is imperative and must be performed with the utmost diligenceor exacta diligentia. But power is discretionary. It may be exercised or it may not. A power is an ability conferred upon a person by law to alter, by his own will, directed to that end, the rights, duties, liabilities or other legal relations, either of himself or of others. A power or discretion given by statute to trustees is in no way different from that which is given by the instrument of trust.
A trustee while exercising his power must do so honestly and while managing trust affairs must take “all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own”.As to judicial control of the discretionary powers of trustees, as decided in Tempest v. Lord Camoys Jessel, M.R., said that in case of pure discretion to trustees the court does not enforce the exercise of a power against the wish of the trustees, but it does prevent them from exercising it improperly.
And now comes the most interesting and subtle distinction between an ordinary prudent man’s behaviour and the scope of the exercise of a trustee’s discretion. As Lord Watson pointed out in Learoyd v. Whiteley a trustee is under a duty to invest; he has a discretion in the selection of investments, but in the exercise of this discretion he is less free than a prudent man would be in investing his own money; for “businessmen of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust and likewise to avoid all investments of that class which are attended with hazard”. If he properly performs his duties, powers and discretions, he is not liable for loss to or depreciation of the trust-property arising from factors beyond his control
In the last hundred years England has seen that due to the appointment of professionals as persons doing the administrative work of a trust, the duties of trustees in their strict application have been mitigated. The courts and statutes have helped in this pacification process so that the requirement of a trustee to act personally has been relaxed, and the exculpating clauses excluding trustees’ personal liability have become statutory. Section 61 of the Trustees Act 1975 in England, therefore, gives the court discretion to excuse a trustee who has acted honestly and reasonably and ought fairly to be excused. But it must be remembered that the standard of diligence expected of an unpaid trustee is less (but equal) than that expected of a paid trustee; the only difference between these two types of trustees being that while an unpaid trustee has an opportunity of taking shelter behind Section 61 of the Trustees Act, a paid trustee will not have such a shelter or to such an extent.
The relationship between trustee and beneficiary is not that of a debtor and creditor. No relationship of trustee and beneficiary exists between the State Electricity Board and its consumers on security deposits made by consumers with the Board for supply of electricity by the Board. The Board is also not a constructive trustee. The object of security deposit is to secure the payment of consumption charges.
Duties of a trustee –
As seen, a duty is an obligation of an imperative nature exacting the utmost diligence. Duties are of two types: positive and negative: positive duties oblige one to do something, negative ones oblige to abstain from doing something. Negative duties are considered to be disabilities. The failure to perform a duty is a breach of trust. The Indian Trusts Act, 1882 lays down the duties of a trustee under Sections 11 to 22 and his liabilities under Sections 23 to 30.
TO EXECUTE THE TRUST (SECTION 11)
As laid down by the section, a trustee
(a) Is bound to fulfil the purpose of the trust; and
(b) To obey the author’s directions contained in the instrument.
Where the directions of the author are illegal, impracticable or manifestly injurious to the beneficiaries, they need not be obeyed. Besides, where all the beneficiaries are competent to contract and they collectively consent to modify the directions or where a court allows a departure from them, the original directions need not be followed. A trust is obligatory and the fulfilment of its purpose in the directed manner is the fundamental duty of a trustee. This finds expression in an adage giving homely truth in a condensed manner, that “he who pays the piper, calls the tune”, or “one who pays, dictates”. Where such directions are given after a trust has been created they are ineffective and of consequences, because on creation of a trust its property is transferred to the trustee and the owner loses all control over it. This is clearly laid down by itself by the expression “directions… given at the time of its creation.
Explanation appended to Section 11 explains the duty of a trustee e the purpose of the trust is for the payment of a debt. There his duty will where the purpose be to-
(i) pay only those debts of the author of the trust which exist and are recoverable at the date of the instrument;
(ii) where such instrument creating a trust is a will, the trustee is to pay those debts which exist and are recoverable at the date of the author’s death. The reason for this is very clear in that a will speaks from the death of a person and is effective only thereafter; and
(iii) in case of debts not bearing interest, a trustee is to make payments without interest.
The gist of Section 11 which lays down a general principle can be stated this way, that a trustee is to execute the trust as far as it is practicable, legally and beneficially, for the cestui que trust; the beneficiaries, if all of them are sui juris and of one mind, can control the trust and the principal Civil Court of original jurisdiction can permit a departure from the author’s original directions in the following cases, as explained and accepted in New case, Re by Romer, L.J.:
(i) where circumstances exist which are not foreseen by the author (and therefore not provided for);
(ii) where the trustees are embarrassed by emergency; and
(iii) where consent of all the beneficiaries cannot be obtained as all of them are not sui juris or not in existence.
This was incorporated in the statute-book in England in Section 57 of the Trustees Act, 1925, but with a warning that such a recasted arrangement which is shown to be “beneficial to the estate or to beneficiaries” will not be the sole criterion on which the court’s jurisdiction is founded. Every case has its own special circumstances and it will be decided accordingly.
Section 11 of the Indian Trusts Act, 1882 incorporates within its sweep only a part of Chapman’s decision, which explains that “where the beneficiary is incompetent to contract, his consent may, for the purposes of this section, be given by a principal Civil Court of original jurisdiction”.
Maitland has very ably summed up the general rules regarding the duties of a trustee thus:
(a) A trustee is bound to do anything that he is expressly bidden to do the instrument creating the trust.
(b) A trustee may safely do anything that he is expressly authorized to do by that instrument.
(c) A trustee is bound to refrain from doing anything that is expressly forbidden by that instrument (supposing that the instrument in question is in no way invalid or unlawful)
(d) Within these limits a trustee must play the part of a prudent owner and prudent man of business.
That is the standard by which his conduct will be judged.
ACQUAINTANCE WITH TRUST-PROPERTY (SECTION 12)
The second duty of a trustee is
(i) to acquaint himself with the nature and circumstances of the trust-property as soon as possible after his appointment.
(ii)He must also obtain a transfer of such property to himself, and
(iii) get in trusts moneys invested on insufficient or hazardous securities. For example trust-money is a debt or a chose-in-action, a trustee should take imme to recover it or to reduce it into possession immediately unless he has well-founded justification for his delay or default. If there are two trustees, it is not advisable for one trustee to allow the property to remo the sole control of one trustee but it should be reduced into the joint control of all.
TO PROTECT TITLE TO TRUST-PROPERTY (SECTION 13)
It is the most fundamental duty of a trustee to secure and place the trust property in a state of security. He has to maintain and defend suits for assertion and protection of its title and for this purpose must take all reasonable and possible steps suitable to the occasion. A trust-property if it is given to the author of the trust by an unregistered deed, it is his duty to get such instrument registered. This situation of a trustee requires the utmost diligence, exacta diligentia, and fidelity on his part. And in doing so he cannot deviate from the letter of the trust.
NOT TO SET UP ADVERSE TITLE (SECTION 14)
Fidelity is the very foundation of a trust. Consequently a trustee cannot and must not, for him or for another, set up or aid any title to the trust-property adverse to the interest of the beneficiary. His interest should not conflict with that of the beneficiary and if it is so, he cannot be allowed to do so unless he obtains a proper discharge from trust with which he has clothed himself. In other words, he cannot impeach the trust, others may. But in that case he cannot join them or aid them; he has to defend the trust-property and assert his title thereto. If the trust is invalid it is for the beneficiaries to set up their claim against it, but it does not befit a trustee to do so.
A trustee consequently cannot mix his own property with that of the trust. If he does so, a burden lies heavily on him to prove that any particular property belongs to him as distinct from the trust-property.
TO EXERCISE REASONABLE CARE (SECTION 15)
Section 15 informs about the care required of a trustee in dealing with trust-property.
He is to observe the highest standard of integrity and a reasonable id of business efficiency in the management of the affairs of the trust, if he fails to reach the standards set, he will be subjected to onerous mal liability as the section and its Illustrations (d) to (h) explain. As has only observed by Maitland, a trustee should do that which he is bidden to d should refrain from doing that which he is forbidden to do.In using discretion the conduct of a prudent and reasonable man is the standard by which he will be judged; if he fails to reach that, he is held liable. As to what a reasonable man or a person of ordinary prudence would do under the circumstances is a question of fact to be answered by the court on evidence; it is not for the trustee to decide. If he can prove his diligence and the care exercised, he will not be liable.
A trustee’s discretion is subject, in India, to control by the principal Civil Court of original jurisdiction as provided in Sections 15, 36 and 49 of the Act. Whether a trust is gratuitous or for remuneration, the liability is the same.
One has to note that in England, equity courts distinguish between duties and discretions. Duties are imposed upon while the discretions are invested in, the trustee. Thus, as regards duties, utmost diligence is the only formidable protection and “mere hardship” is no defence but as regards discretion, the standard is the amount of diligence one would bestow on one’s own property. still, however, in both the cases failure to reach the expected standard amounts to a breach of duty. Strahan in his digest of equity has rightly pointed out that it is a question of fact whether in a particular case reasonable care has been exercised or not, and it can be proved only by evidence. But it is a dangerous practice to decide a question of fact by help of precedents as to what amounts to reasonable care. If this is allowed it would go to establish a “doctrine of constructive want of care” similar to the venerable but exploded doctrine of constructive fraud.
A financial corporation granting loan on hypothecation of property of the loanee is a trustee of the property hypothecated and shouldshould act as a prudent owner, bona fide and in good faith while resorting to coercive method such as sale of the property hypothecated in case of default in repayment Trusteeship has nowadays become a readily available tool for every purpose of organi and trusteeship is an institution of elasticity and generality.
Thus where the property of the debtor stands transferred to a Financial Corporation for management or possession thereof which includes right to sell or further mortgage, etc., the Corporation or its officers or employees stand in the shoes of the debtor as trustee and the property cesti que trust. The very idea is reiterated in N. Surya Narayan Iyer’s book as under:
“Where the trustee is empowered to sell any trust-property… by public auction or private contract and either at one time or at several times….” The duty of trustee is to obtain the best price. He should therefore use reasonable diligence in inviting competition to that end. Contracts entered into by trustees bona fide would not be invalidated or cancelled by a court, but a trustee should not act in haste unmindful of the consequences.
Where in a trust for sale and payment of creditors the trustee. undervaluation showing a preference to one of the creditors, he woni of breach of trust. If the purchaser is privy to fraud the property tools recovered from him.
In short, for the trustee, “as is the job, so is the care” to be exercised.
TO CONVERT PERISHABLE PROPERTY (SECTION 16)
Section 16 of the Indian Trusts Act embodies the well-known rule in H v. Earl of Dartmouth. It lays down that unless there is a specific intention in the instrument of trust that the property should be enjoyed in specie, it is the duty of a trustee to convert perishable property into that of a permanent and profitable character.
It must be noted that this rule has but limited application and it does not apply to property settled inter vivo, nor to specific as opposed to residuary Nor does it apply to freehold lands nor to leaseholds held for a term nor does it apply to exceeding sixty years.
TO BE IMPARTIAL (SECTION 17)
Where there are more beneficiaries than one, he cannot execute the trust in favor of one at the expense of another. He has to be impartial. He has not to pick and choose between beneficiaries; that is not given to him. He should not favor a tenant for life by investing in more productive but less secure property. He has to hold the scales evenly between the beneficiaries. The rule in Howe case is applicable here too, for it is a trustee’s duty to hold an even hand between all their beneficiaries.
TO PREVENT WASTE (SECTION 18)
Where out of several beneficiaries in succession, one in possession of the property commits or threatens to commit waste; the trustee must prevent it, as it is his duty. The meaning is very plain that a life tenant cannot behave in a manner prejudicial to the interests of the remainder man. Such acts either of destruction or of depreciation of the value of the trust-property are known as waste, which a trustee is bound to prevent unless they are permissive in their character.
ACCOUNTS AND INFORMATION (SECTION 19)
A trustee is bound to maintain clear, accurate and proper accounts of to property and must be prepared to produce it on demand by the beneficiaries should not ‘conceal’ anything. He is also bound to render such accounts: respect of the state of the trust-property. He is at the same time entitled in Section 35 to get his accounts settled and examined on completion of his office and to an acknowledgement from the beneficiaries that there is nothing due to him to the trust. He cannot advance his illiteracy or incapability as a defence for his fault. Consequently, as decided in Lakhmichand v. Jaykuvarbai he becomes prima facie liable for the loss that thereby occurs
A trustee should not mix trust-property with any private property. If he does so it lies heavily upon him to prove that a particular property is his. Besides this, a trustee is not only liable for moneys received in his possession but also liable for moneys which might have come into his possession had he acted with suitable alertness and diligence.
INVESTMENT OF TRUST-MONEY (SECTIONS 20, 20-A, 21 AND 22)
Sections 20, 20-A and 21 of the Act cast a duty upon the trustee to investthe trust-property, if it is money not immediately needed, into the security mentioned therein and in no others. Where a trustee is directed to sell within specified time he should do so unless he has valid and justifiable reasons to otherwise. Section 22 in this respect is more a power to a trustee than a duty is a power to sell within a specified time conferred upon him by a direction contained in the deed, but it is his duty to sell.
As we have seen, the duties of trustees are many. Those who are asked to become trustees “are bound to inquire of what the property consists of that is proposed to be handed over to them and what the trusts are. They ought also to look into the trust documents and papers to ascertain what notices appear among them of incumbrances and other matters affecting the trust”.
So In carrying out the trusts they must take due care of the trust-property by investing it prudently and in the manner directed; they must give information to the beneficiaries when required and in some cases submit to their directions; they must comply with any directions of the court and when in difficulty seek its aid; and finally they must make no profit out of the trust unless authorised. In other words, on appointment trustees must make themselves acquainted with the state and details of the trust-property, check that the trust fund is invested in accordance with the provisions of the trust deed and that the securities are in proper custody. They should not wait until the trust-property is formally vested in them. The discharge of their duties will obviously depend upon circumstances but the duty to protect the trust assets is a stringent one is also a continuous one. It is enforced very stringently too. As would be seen from the sections, the most important or basic duties of trustees are duties of collecting, of investing and of distributing the assets according to claims, and to provide accounts and information with due regard to the principle of equality. A trustee should not keep unnecessary cash with him which is not required for immediate expenses. This should be avoided.
1) Equity,Trusts And Specific Relief(4thedition) – B.M Gandhi
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