The Judicial Committee of the Privy Council Decisions

7 July.

The judgment of their Lordships was delivered by LORD TEMPLEMAN .

The question is whether in the winding up of an insolvent bank trustee the liquidator must pay the trust deposit accounts lawfully maintained by the bank trustee in priority to payment of the customers' deposit accounts and the debts owed by the trustee bank to other unsecured creditors.

A customer who deposits money with a bank authorises the bank to use that money for the benefit of the bank in any manner the bank pleases. The customer does not acquire any interest in or charge over any asset of the bank or over all the assets of the bank. The deposit account is an acknowledgement and record by the bank of the amount from time to time deposited and withdrawn and of the interest earned. The customer acquires a chose in action, namely the right on request to payment by the bank of the whole or any part of the aggregate amount of principal and interest which has been credited or ought to be credited to the account. If the bank becomes insolvent the customer can only prove in the liquidation of the bank as unsecured creditor for the amount which was, or ought to have been, credited to the account at the date when the bank went into liquidation.

On the other hand a trustee has no power to use trust money for his own benefit unless the trust instrument expressly authorises him so to do. A bank trustee, like any other trustee, may only apply trust money in the manner authorised by the trust instrument, or by law, for the sole benefit of the beneficiaries and to the exclusion of any benefit to the bank trustee unless the trust instrument otherwise provides. A bank trustee misappropriating trust money for its own use and benefit without authority commits a breach of trust and cannot justify that breach of trust by maintaining a trust deposit account which records the amount which the bank has misappropriated and credits interest which the bank considers appropriate. The beneficiaries have a chose in action, namely, an action against the trustee bank for damages for breach of trust and in addition they possess the equitable remedy of tracing the trust money to any property into which it has been converted directly or indirectly.

A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank. Where an insolvent bank goes into liquidation that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because the customers and other unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full. On the other hand, the settler of the trust and the beneficiaries interested under the trust, never accept any risks involved in the possible insolvency of the trustee bank. On the contrary, the settler could be certain that if the trusts were lawfully administered, the trustee bank could never make use of trust money for its own purposes and would always be obliged to segregate trust money and trust property in the manner authorised by law and by the trust instrument free from any risks involved in the possible insolvency of the trustee bank. It is therefore equitable that where the trustee bank has unlawfully misappropriated trust money by treating the trust money as though it belonged to the bank beneficially, merely acknowledging and recording the amount in a trust deposit account with the bank, then the claims of the beneficiaries should be paid in full out of the assets of the trustee bank in priority to the claims of the customers and other unsecured creditors of the bank. "If a man mixes trust funds with his own, the whole will be treated as the trust property, . . . that is, that the trust property comes first; . . ." per Sir George Jessel M.R. in In re Hallett's Estate (1880) 13 ChD 696, 719, adopting and explaining earlier pronouncements to the same effect. Where a bank trustee is insolvent, trust money wrongfully treated as being on deposit with the bank must be repaid in full so far as may be out of the assets of the bank in priority to any payment of customers' deposits and other unsecured debts.

Equity thus protects beneficiaries against breaches of trust. But equity does not protect beneficiaries against the consequences of the exercise in good faith of powers conferred by the trust instrument.

Although as a general rule, a trustee is not allowed to derive a benefit from trust property, that general rule may be altered by the express terms of the trust instrument. One illustration is an express provision in a settlement which permits a trustee to charge and deduct from trust money remuneration for the services of the trustee. A settlement may also confer on a trustee power to make use of trust money in other ways. Certain of the settlements of which Mercantile Bank and Trust Co. Ltd. ( "M.B.T.") was appointed trustee conferred power on M.B.T.:

"To open and maintain one or more savings accounts or current accounts . . . with any bank . . . even if . . . such bank . . . shall be acting as trustee . . . to deposit to the credit of such account or accounts all or any part of the funds belonging to the trust fund whether or not such funds may earn interest from time to time . . . [and] to withdraw a portion or all of the funds so deposited . . ."

The trial judge, da Costa C.J., sitting in the Supreme Court of the Commonwealth of the Bahamas held, the Court of Appeal (Luckhoo P., Smith and Zacca JJ.A.) agreed and it is not disputed that: "The effect of that clause was clearly to empower M.B.T. as trustee to deposit with M.B.T. as banker moneys that they received in trust."

The effect of the clause was also to empower M.B.T. to treat trust money so notionally deposited as if M.B.T. were beneficially entitled to the trust money, just as M.B.T. was entitled to treat customers' money deposited with M.B.T. as if M.B.T. were beneficially entitled to that money. Trust money deposited with M.B.T. as banker and customers' money deposited by customers with M.B.T. as banker were alike lawfully available to M.B.T. for payment of M.B.T.'s expenses, for making investments for the benefit of M.B.T. and in any other manner for the benefit of M.B.T. as money belonging absolutely and beneficially to M.B.T., to be disposed of without regard to the interests of beneficiaries or customers.

When a customer deposited money with M.B.T. and the amount of the customer's money was credited to a customer's deposit account, the customer did not become entitled to any interest in any asset or in all the assets of M.B.T. The sole right of the customer was to be paid at his request a sum equal to the amount standing to the credit of his deposit account. There was nothing to trace.

When M.B.T. as trustee lawfully deposited trust moneys with M.B.T. as banker pursuant to the authority in that behalf conferred by the settlement and the amount of the trust fund so deposited was credited to a trust deposit account, the beneficiaries interested under the trust did not become entitled to any interest in any asset or in all the assets of M.B.T. The sole right of the beneficiaries was for a sum equal to the amount standing to the credit of the trust deposit account, to be applied by M.B.T. in any manner authorised or required by the settlement or by law as and when M.B.T. decided to make such application in the proper exercise and discharge of its discretionary powers and duties in the due course of administration of the trust. If M.B.T. ceased to be trustee and a new trustee were appointed then it would be for the new trustee to decide whether to close the trust deposit account with M.B.T. and to require M.B.T. to pay to the new trustee the amount standing to the credit of the trust in the MBT trust deposit account. There would be nothing to trace.

When M.B.T. became insolvent and went into liquidation the beneficiaries were entitled to obtain and have obtained the appointment of a new trustee in the place of M.B.T. The new trustee can only prove in the winding up of M.B.T. for the amount standing to the credit of the trust with M.B.T. in the trust deposit account at the date of liquidation. The claim of the new trustee will be as an unsecured creditor ranking pari passu with the claims of a customer proving for the amount standing to his credit with M.B.T. in the customer's deposit account.

There is no justification for the intervention of equity. The settler has allowed trust money to be treated as if it were customers' money. The settler has allowed M.B.T. to appropriate trust money and to treat the trust money as belonging absolutely and beneficially to M.B.T. By depositing money with M.B.T. a customer accepted the risk of M.B.T.'s insolvency. By allowing M.B.T. to treat trust money as a deposit with M.B.T. the settler accepted the risk of M.B.T.'s insolvency. In these circumstances it would be inequitable if the trust were in a better position than the customer.

Da Costa C.J., supported by the Court of Appeal, held that when M.B.T. transferred trust money "into its banking business that money does not cease to be impressed with a trust." But the trust money did cease to be impressed with the trust. The trust money became the property of M.B.T. in law and in equity and M.B.T. was entitled to use that money for the purposes of M.B.T. in any manner that M.B.T. pleased. The trust fund did not continue to be the money transferred into the banking business of M.B.T. The trust fund became the obligation of M.B.T. to treat the trust deposit account with M.B.T. as banker in the same manner as M.B.T. would have dealt with a deposit account credited with trust money lawfully transferred and deposited by M.B.T. as trustee with another independent bank as banker. On the insolvency of that independent bank the trustee M.B.T. could only rank as unsecured creditor for the amount of the deposit account. Similarly, on the insolvency of M.B.T. which lawfully appropriated trust money to itself and credited the amount of the moneys so appropriated to a trust deposit account, the new trustee of the trust can only rank as an unsecured creditor on behalf of the trust.

Their Lordships will humbly advise Her Majesty that the appeal should be allowed, that the orders made by the courts below, save for the orders relating to costs, should be discharged and that it should be declared that the trust creditors of M.B.T. claiming in respect of trust money lawfully treated as on deposit with M.B.T. rank pari passu with the unsecured creditors of M.B.T. in the distribution of the assets of M.B.T. in liquidation. The costs of all parties of the hearing before the Board should be paid by the liquidator as expenses of the winding up.

S. S.

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