P L N K M NAGAPPA CHETTIAR Vs. OFFICIAL ASSIGNEE OF MADRAS, AS THE ASSIGNEE OF THE ESTATE OF PLNKSUBRAMANIAM CHETTY

JUDGEMENT

(1.) This is an appeal from an order of Walleir, J., passed in the insolvency of P.L.N.K. Subramaniam Chetty. The applicant, now appellant, was one P.L.N.K.M. Nagappa Chetty, son of a brother of the insolvent, and he claimed a preferential right to certain trust moneys said to be included in the funds in the Official Assignee's hands. At a partition in 1916 between the insolvent on the one hand, and the appellant and his brother Lakshmanan Chetty on the other, two sums each of Rs. 10,000 subscribed to as to 3/8 by the insolvent and as to 5/8 by the brothers:, were set apart for two charities, with the parties to the partition as co- trustees. In respect of his own and his brothers share in these trust funds the appellant, on 1 December, 1916, drew two hundiesi in favour of the insolvent on a firm at Madras known as the O. R. M. O. M. S. P. Firm (I will refer to it for short as the O.R.M. Firm). The insolvent kept the amounts of the hundies in deposit with this firm until 1920. It is common ground that he was at liberty to use the money in his business, undertaking to credit the trusts with interest at the nadappu rate; and, acting under this authorisation, he then carried out an adjustment with the O.R.M. Firm whereby the sums representing the appellant's contributions, amounting with interest to Rs. 15,732-15-9, were appropriated to discharge the outstanding liability of his own firm, which stood at the approximately equal figure of Rs. 15,700. His insolvency ensued in 1925, and it is in respect of two sums, one of Rs. 5,000 and the other of about Rs. 40,000, the sources of which I will mention later, and which form the only assets available, that the claim is made. It is to be noted that arguments have proceeded on the assumption that there was a perfected trust, no challenge to that position having been raised before us by the respondent's learned advocate.

(2.) Upon these facts the learned Judge has decided against the Official Assignee in regard to the contention that, as soon as the insolvent used the money in his business, a relationship of creditor and debtor was created between the trustees and himself in respect of it; and in favour of the Official Assignee that the money, although remaining trust money, cannot be traced. His conclusions upon this latter point are (a) that utilisation of the trust money to pay his own debt to the bankers was merely a book adjustment, which put an end to the process of "following", (b) that, assuming that the process could be carried over that adjustment, the money in the Official Assignee's hands was demonstrably not part of the trust funds. The respondent endeavours to show that all these questions should be answered in his favour.

(3.) His contention on the, first point, which, as I have said, has been decided against him, is that, so soon as the money was authorisedly invested in the business, it ceased to be subject to the trust, which became impressed upon a corresponding debt due from the insolvent to the trustees. We have to look very carefully at the subject-matter of the trust, and consider whether, as soon as the insolvent permissively obtained control of it for his own purposes, it did not undergo a transformation in character. As an illustration of such a transformation may be given the case where a trustee is authorised to invest trust money in ordinary joint-stock securities. Clearly the trust passes away from the money and attaches itself to the scrip representing a right to dividends or interest; and the trustee is no longer responsible for anything more than the value of the securities, whether, when the time comes to realise, it be greater or less than the original sum. Similarly, if in the present case the money had been invested not in the insolvent's firm but in a third party firm, it is conceded that, as between the trustees and that firm, the relationship would be merely one of debtor and creditor; in other words, the trust would be impressed not upon the money but upon the debt. It has been urged that the present is really a case of that description, because there are two trustees and the money was only invested with one of them; and it cannot therefore be said that the two parties to the transaction are indistinguishably one and the same. Apart from this point, Mr. V.V. Srinivasa Aiyangar's argument for the appellant is that where a trustee is permitted to make use of the trust funds, his obligation as trustee so far overrides the mere liability as debtor which he would otherwise be under that he must account for the money, as trust money, just as much as if the user had never been in contemplation and, in fact, was in breach of the trust. No English case has been cited in support of the proposition, but one or two cases of this Court have had to consider it. The earliest of these cases arose out of the Arbuthnot insolvency: Official Assignee of Madras V/s. Krishnaswami Naidu (1909) I.L.R. 33 M. 154. The trust deed which there came under consideration appointed the then members of the firm as trustees, and directed that the trust moneys should be placed in deposit, bearing 5 per cent, interest, with Arbuthnot & Co. Munro, J., came to the conclusion that the trustees and the banking firm could be regarded as two distinct and separate entities, when of course the liability of the Bank would be only that of a debtor. But he held further that, even regarding them as identical, there could be no difference in principle. "When, as trustees under the deed, they, as directed, invested the money in their own firm, their liability in their capacity as trustees appointed by the deed was reduced in the same manner as if they had not. been members of the firm. When the money was invested with them as bankers, the same result must, there being no reason to the contrary, have followed as would have followed had the money been invested with another bank with which they had no connection."