On the Law of Constructive Trusts in India

[Niranjan Sankar Rao is a fourth year B.A. LL.B. (Hons) student at Jindal Global Law School, Sonepat, Haryana, India.

The author is grateful to Mr Aditya Swarup, Professor, Jindal Global Law School and Mr Mihir Naniwadekar, Advocate, Bombay High Court, for their guidance.]

This post explores what constitutes an equitable or constructive trust in English law and attempts to analyse it in light of section 94 of Indian Trusts Act, 1882 (the “Act”), a provision that has now been repealed. The term equitable trust denotes a trust that arises by virtue of an equitable or beneficial interest in property, a proprietary interest that can be claimed on equitable grounds. Such trusts are also known as constructive trusts.

An earlier post by Mr Mihir Naniwadekar confines itself to situations expressly provided for in the Act under section 88. It leaves unanswered the question of whether Indian law adopts the remedial or institutional model. I attempt to revisit section 94 and analyse the possibility of conferring proprietary remedies in situations that go beyond the express confines of the Act. I further make a case for Indian law favouring the institutional model of constructive trusts.

A constructive trust arises by operation of law, without regard to the intention of the parties to create a trust.[1] It therefore does not require a deed signifying the institution of a trust. The beneficiary has an equitable or beneficial interest in the trust property implying that, during insolvency, his claim will rank above that of other unsecured creditors of the trustee.

Lord Browne-Wilkinson distinguishes between remedial and institutional constructive trust concluding that English law recognises the latter:[2]

Under an institutional constructive trust, the trust arises by operation of law as from the date of the circumstances which give rise to it: the function of the court is merely to declare that such trust has arisen in the past. The consequences that flow from such trust having arisen (including the possibly unfair consequences to third parties who in the interim have received the trust property) are also determined by rules of law, not under a discretion. A remedial constructive trust is different. It is a judicial remedy giving rise to an enforceable equitable obligation: the extent to which it operates retrospectively to the prejudice of third parties lies in the discretion of the court.

(emphasis supplied by the author)

Both models rely on the courts to declare a proprietary interest. Contrary to what Mr Naniwadekar has argued in the previous post, I respectfully submit that Rajah of Ramnad v. Chettiar AIR 1916 Mad 350 (“Rajah”) merely affirms the aforesaid principle. I support this interpretation drawing from the Court’s reasoning in response to the second contention of the appellant, that of Indian law not requiring the courts to declare a constructive trust for it to be operative. The difference between both the models lies in judicial discretion in a remedial trust to determine the “extent to which it operates retrospectively” and the rigidity of an institutional trust that does not allow for this. Further, I argue that the judgment does not expressly or impliedly negate the institutional model. For these reasons, I submit in line with CIT v. Tanubhai Desai and CIT v. Sanderson & Morgan and Rajah, that Indian law adopts the institutional model.

Section 94 of the Act has allowed the creation of a constructive trust when situations went beyond the confines of the Act. However, in 1988, the Benami Transactions Prohibitions Act repealed this provision for the reason that it might lead to an increase in Benami Transactions. Law Commission’s 130th Report merely states that section 94 would act as a shield for sham transactions.

All possible situations and outcomes of a private trust have been expressly provided in the Act. Having said that, section 94 of as it originally stood, retained the court’s discretion in creation of “constructive trusts in cases not expressly provided for”. Although section 94 of the Act has been repealed, it can be argued that the courts still retain their equitable jurisdiction in declaring a constructive trust under section 88 of the Act and section 151 of the Code of Civil Procedure (“CPC”). The counter-argument could be that section 88 does not provide for constructive trusts and only speaks of obligations in the nature of a trust. This is something I wish to address in another post.

If declaration of a constructive trust is left to the judiciary and an institutional model is followed, the court would merely be tasked with ascertaining the point of unconscionability. It is unlikely that this exercise could further Benami transactions in any manner.

Section 88 of the Act is clear as to the fact that proprietary remedy is available in case of a breach of a fiduciary duty. In Gopal L. Raheja v. Vijay B. Raheja 2007 (4) BomCR 288 (“Raheja”), the Bombay High Court restrained itself from venturing into its equitable jurisdiction in applying the English doctrine of constructive trusts when the legislature has specifically deleted it from the statute. In the instant case, another remedy was pleaded for under section 88 of the Act.

Justice DY Chandrachud in Raheja reasons that since the legislature has repealed the provision pertaining to constructive trusts, Indian courts cannot take recourse to English law. The author humbly submits that the courts’ willingness to declare the operation of a constructive trust through its equitable jurisdiction is not barred due to section 94 of the Act being repealed. The Benami Transactions Prohibition Act of 1988 seeks to prevent Benami transactions. If the court is seized of a situation that does not warrant a Benami transaction, there seems to be no fetter in declaring a trust and identifying the point of unconscionability on part of the defendant, even if the situation falls outside the purview of the Act. This jurisdiction can be derived from section 151 of the CPC and section 88 of the Act.

In the case of S. Kotrabasappa v. The Indian Bank AIR 1987 Kant 236 (“Kotrabasappa”), the plaintiff bank mistakenly credited an amount twice into the account of the defendant. The Court determined that there indeed was unconscionability on part of the defendant as soon as he knew about this error and that the monies are returned to the plaintiff due to the operation of section 70 of the Indian Contract Act. Interest payable on the monies was left unresolved. The plaintiff pleaded for creation of a proprietary interest under section 94 on the capital gains, but the Court confined the remedy solely to the Interests Act.

The facts of Kotrabasappa are strikingly similar to Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. Goulding, J. in the latter declared a proprietary interest in favour of the claimant. The judgment fails in substantiating why this interest arose. Lord Browne-Wilkinson in London Borough Council (discussed earlier) reasons that the moment the defendant has acted unconscionably in not repaying the money, after it had discovered the mistake, gives rise to an institutional constructive trust by operation of law.

It is submitted that the Court had jurisdiction in Kotrabasappa to grant a proprietary interest to the plaintiff under section 94 in 1987. Recourse to Interests Act could have been taken for the sole purpose of determining the rate of interest payable for the sum of money held by the defendant in trust for the plaintiff. Moreover, section 151 of the CPC and section 88 of the Act could also have aided in declaring proprietary interest.

When a trustee becomes insolvent, his assets are divided to satisfy his creditors. In case a beneficiary has an equitable right in the asset, the trustee no longer has beneficial interest in it. It therefore is removed from the trustee’s asset pool, as they belong in equity to the beneficiary. Only the remaining assets that belong to the trustee beneficially are then distributed amongst the remaining creditors (generally pari passu, or proportionally).[3] Secondly, where the claimant has a property interest that is not a security interest, and the property increases in value, the claimant will reap the benefit of that increase.[4] Depriving the benefits of a proprietary interest would disadvantage the plaintiff by depriving it of the benefit of tracing his claim.[5]

Section 151 of the CPC saves the inherent powers of the court to take measures in the interest of justice. Therefore if justice and equity demand, the courts are open in declaring an institutional constructive trust in case a fact situation fails to fit squarely within the confines of the Act. Section 88 of the Act provides for obligations in the nature of a trust. Whether this can be rightly extended to hold that the provision provides for a constructive trust is something that can be explored. Arguably, institutional trusts could disenfranchise other unsecured creditors of their rightful claim that remedial trusts resolves. The counter-argument is that remedial trusts do not have sufficient guidelines. As argued previously, India favours the institutional model.

Niranjan Sankar Rao

[1] Air Jamaica v. Charlton [1999] 1 WLR 1399, 1412 (Lord Millet).

[2] Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705.

[3] Paul S. Davies, Graham Virgo & E. H. Burn, Equity & Trusts: Text, Cases, and Materials (2016).

[4] Ibid.

[5] See Re Hallett’s Estate (1880) 13 Ch D 696

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