Breach of Trust

2021 PLD 88 KARACHI-HIGH-COURT-SINDH Judicial Precedent

Ss. 81 & 82Specific Relief Act (I of 1877), Ss. 42 & 54Suit for declaration, injunction and recovery of moneyBreach of trustBeneficial interests, transfer ofBenami accountProofPlaintiff and defendant were husband and wife inter se and the relation ended in separation

Plaintiff claimed to have opened three Bank accounts in the name of defendant (wife) who at the time of leaving his house also took along with her Defence Saving Certificates

Plaintiff sought recovery of money of Defence Saving Certificates

Validity

Defence Saving Certificates were purchased from the income of plaintiff (husband) and defendant (wife) was not joint owner as claimed by her

Defendant was in fact a trustee and plaintiff had proved his case including the motive that in order to meet any eventuality, mishap or exigency, the Defence Saving Certificates were purchased in joint name of plaintiff (husband) and defendant (wife), whereas sister of plaintiff was mentioned as nominee

Defendant (wife) was not authorized to dispose of/sell (encash) the Certificates even before date of maturity, causing losses to plaintiff

Encashing the Defence Saving Certificates along with accruals and transferring entire sale proceeds into her independent Bank account and not in joint Bank accounts maintained by her and plaintiff were sufficient to hold that she was not the joint owner but a trustee and was guilty of breach of trust

Motive for purchasing the Certificates in joint name of plaintiff and defendant with sister of plaintiff as nominee was established

Provisions of Ss. 81 & 82 of Trusts Act, 1882, as judicially interpreted were applicable

High Court directed the defendant (wife) to return amount of Defence Saving Certificates at their face value together with interest

High Court also directed the defendant to return loss amount caused by pre-mature encashing of the Certificates

Suit was decreed accordingly.

2015 SCMR 177 SUPREME-COURT-OF-UK Judicial Precedent

Breach of duty by trusteeBeneficiaryRemedyScope

Basic right of a beneficiary was to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law

Where there had been a breach of such duty, the basic purpose of any remedy would be either to put the beneficiary in the same position as if the breach had not occurred or to vest in the beneficiary any profit which the trustee may have made by reason of the breach (and which ought therefore properly to be held on behalf of the beneficiary)

Placing the beneficiary in the same position as he would have been in but for the breach may involve restoring the value of something lost by the breach or making good financial damage caused by the breach

Monetary award which reflected neither loss caused nor profit gained by the wrongdoer would be penal.

2015 SCMR 177 SUPREME-COURT-OF-UK Judicial Precedent

Duties owed under trustScopeBreach of duty by trustee

Effect.

2015 SCMR 177 SUPREME-COURT-OF-UK Judicial Precedent

Equitable compensation, measure ofPrinciplesSolicitor acting in breach of trust

Borrowers applied to the appellant-bank to borrow £3.3 million to be secured by way of a legal charge/mortgage over the borrowers' property

Property in question was already the subject of a first legal charge/first mortgage in favour of Bank B

Appellant-bank advanced the amount to its solicitors for releasing the same to borrowers on the condition that the then existing first charge with Bank B was to be redeemed on or before release of the amount

Solicitors used the advance to make payment to Bank B believing they had made full payment to redeem the first charge, and released the remaining amount to the borrowers

Solicitors had in fact paid Bank B about £300,000 less than the total balance, because of which Bank B refused to release its first charge

Consequently appellant-bank accepted the primacy of the Bank B's charge and consented to registration of its own charge as a second charge

Borrowers defaulted and the property was repossessed by Bank B and sold, of which the appellant-bank received only £867,697, about £273,777.42 less than it should have done if the solicitors had remitted the correct amount to Bank B to release/redeem the first charge

Appellant-bank issued proceedings against the solicitors seeking to recover the full amount of loan i.e. £3.3 million less £867,697 that it had already recovered

Appellant-bank alleged that the solicitors had acted in breach of trust, breach of fiduciary duty, breach of contract and in negligence

Validity

Solicitors held the money advanced by the appellant-bank on trust for the purpose of performing their contractual obligations

Solicitors broke their contract and acted in breach of trust when they released to the borrowers the money advanced by the appellant-bank, when they should have paid to Bank B the full amount required to redeem the mortgage/charge of Bank B, and should have then released the remaining balance to the borrowers

To say that there had been a loss to the trust fund in the present case of about £2.5m (£3.3 million - £867,697 already received) by reason of the solicitors' conduct, when most of that sum would have been lost if the solicitors had applied the trust fund in the way that the appellant-bank had instructed them to do, was to adopt an artificial and unrealistic view of the facts

Monetary compensation, whether classified as restitutive or reparative, was intended to make good a loss

Basic equitable principle applicable to breach of trust was that the beneficiary was entitled to be compensated for any loss he would not have suffered but for the breach

In the present case, proper performance of the obligations of which the trust formed part would have resulted in the solicitors paying to Bank B the full amount required to redeem the first mortgage/legal charge , and the appellant-bank would have had security for an extra £300,000 of its loan

Appropriate order was for solicitors to pay appellant-bank £273,777.42 plus interest

Per Lord Reed, JSC: Proceeds of sale of mortgaged property were insufficient to meet the borrowers' liabilities to both Bank B and appellant-bank, and in consequence appellant-bank received approximately £273,777.42 less than they would have done if solicitors had fulfilled their instructions

Argument of appellant-bank that it was entitled to entire £3.3m, less the £867,697.78 which it had already received on the sale of the property, was based on three fallacies, first, it assumed that solicitors misapplied the entire £3.3m, whereas all that was misapplied was the approximate £300,000 which was paid to the borrowers rather than to Bank B; second, that it assumed that the measure of solicitors' liability was fixed as at the date of the breach of trust, and third, that it assumed that liability did not depend on a causal link between the breach of trust and the loss

Solicitors were sought to be made liable for the consequences of the hopeless inadequacy of the security accepted by appellant-bank before solicitors' involvement

Loss to the trust estate as a result of solicitors' breach of trust proved to be £273,777.42; pecuniary value of the difference between a first ranking security and one which was postponed to Bank B

Said loss was also the loss to appellant-bank, which was absolutely entitled to the trust estate

Trust no longer being on foot, the appropriate order was for solicitors to pay appellant-bank £273,777.42 plus interest

Appeal was dismissed accordingly.

2015 SCMR 177 SUPREME-COURT-OF-UK Judicial Precedent

Equitable compensation, measure ofCausation and foreseeability of lossPrinciples

Model of equitable compensation, where trust property had been misapplied, was to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation

Where the trust had come to an end, the trustee could be ordered to compensate the beneficiary directly

Compensation in such a situation was assessed on the same basis, since it was equivalent in substance to a distribution of the trust fund

Where the trust fund had been diminished as a result of some other breach of trust, the same approach ordinarily applied, mutatis mutandis

Measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight

Foreseeability of loss was generally irrelevant, but the loss must be caused by the breach of trust, in the sense that it must flow directly from it

Losses resulting from unreasonable behaviour on the part of the claimant would be adjudged to flow from such behaviour, and not from the breach

Requirement that the loss should flow directly from the breach was also the key to determining whether causation had been interrupted by the acts of third parties.

2015 SCMR 177 SUPREME-COURT-OF-UK Judicial Precedent

Liability of trusteeScope"Breach of trust""Breach of contract""Tortious act"Distinction

Trustee's liability for breach of trust, even where the trust arose in the context of a commercial transaction which was otherwise regulated by contract, was not generally the same as a liability in damages for tort or breach of contract

Trust imposed different obligations from a contractual or tortious relationship, in the setting of a different kind of relationship

Law responded to such differences by allowing a measure of compensation for breach of trust causing loss to the trust fund which reflected the nature of the obligation breached and the relationship between the parties.

2012 CLD 1 LAHORE-HIGH-COURT-LAHORE Judicial Precedent

S. 7(4)Penal Code (XLV of 1860), S. 406Constitution of Pakistan, Art. 199Constitutional petitionBreach of trustQuashing of F.I.R.Petitioner obtained loan from complainant Bank and mortgaged assets and properties, besides hypothecation of stock

Complainant Bank on inspection of stock, noted deficiency therein and intimated the petitioner but their grievance was not properly redressed

Case under S. 406, Penal Code, 1860 was got registered against petitioner for mis-appropriation of hypothecated stock

Petitioner's contention was that under S.7(4) of Financial Institutions (Recovery of Finances) Ordinance, 2001 the only remedy available to complainant Bank was to file complaint before Banking Court to decide the matter as there was embargo under the Ordinance to avail remedy under any ordinary law, either civil or of criminal nature

Validity

No order for quashing of F.I.R. could be passed in absence of any finding that the offences mentioned in F.I.R. were false and malicious and there was no finding that a particular forum or mode had been prescribed with respect to taking of cognizance of an offence which also implied prohibition regarding the registration of F.I.R.

Registration of F.I.R. and taking of cognizance of cases were two distinct and independent concepts under the criminal law

If the intention of law-maker was to put any clog on the registration of F.I.R. then the legislature would have said so specifically and if the law put a condition only on the taking of cognizance then it could never be read to imply prohibition on registration of F.I.R.

Petition was dismissed in circumstances.

1994 SCMR 1431 SUPREME-COURT Judicial Precedent

Breach of TrustBribeBribe is a gift accepted by a fiduciary (a trustee, servant, agent etc.) as an inducement to him to betray his trustFiduciary is accountable for the benefit he derives from the trust and the bribe is such benefit:[Words and phrases].

Bribe accepted by a trustee, servant, agent or other fiduciary cause loss or damage to the beneficiaries, master, or principal whose interests $'have been betrayed

Amount of loss or damage may not be quantifiable.

[Bribe].

1969 PLD 65 SUPREME-COURT-AZAD-KASHMIR Judicial Precedent

Ss. 47 & 145-Breach of trust-Criminal charge against supurdar of attached property Proper course: to proceed against him in same execution proceedings and not in criminal Court.