Indian Trusts Act, 1882
Breach of Trust and the Trustee's Liability (Sections 23 and 24)
A breach of trust is a breach of any duty imposed on a trustee, as such, by any law in force (Section 3). Sections 23 and 24 state the consequence: the trustee must make good the loss the breach has caused, with interest in defined cases, and he cannot reduce his liability by setting off a gain made through a different breach. This note explains the measure of liability, the defences available where the beneficiary was involved in the breach, the interest rules, and the bar on set-off.
1. The Basic Rule (Section 23)
Section 23, Indian Trusts Act, 1882 (liability for breach of trust) Where the trustee commits a breach of trust, he is liable to make good the loss which the trust property or the beneficiary has thereby sustained, unless the beneficiary has by fraud induced the trustee to commit the breach, or the beneficiary, being competent to contract, has himself, without coercion or undue influence having been brought to bear on him, concurred in the breach, or subsequently acquiesced therein, with full knowledge of the facts of the case and of his rights as against the trustee. |
Making good the loss
The trustee's liability is to restore the trust fund, or compensate the beneficiary, for the loss the breach caused. Three features stand out:
- Personal liability: the trustee is liable from his own pocket. Where co-trustees are involved, liability is joint and several (Section 27; Topic 18).
- Loss caused by the breach: the loss must have been sustained "thereby", that is, caused by the breach. A trustee who invests in an unauthorised security is liable for the fall in its value; a trustee who sells at an undervalue is liable for the difference.
- Loss to the trust or to the beneficiary: liability runs to the trust property (so that the fund is restored for all beneficiaries) or to a particular beneficiary who has suffered loss.
Good faith is no defence to liability for an unauthorised act. A trustee who honestly but mistakenly pays the wrong person, or makes an investment the trust does not permit, must still make good the loss. His honesty may matter for costs, for contribution between co-trustees (Section 27) and for criminal liability, but not for the civil duty to restore. Unlike English law, which gives the court power to relieve a trustee who acted honestly and reasonably (Trustee Act 1925, Section 61), the Indian Act has no general provision of this kind.
2. When the Beneficiary Cannot Complain
Section 23 excludes liability to a beneficiary who was himself responsible for the breach in one of three ways:
Ground | Requirements |
|---|---|
Fraud by the beneficiary | The beneficiary, by fraud, induced the trustee to commit the breach |
Concurrence | The beneficiary, being competent to contract, concurred in the breach, free of coercion or undue influence, with full knowledge of the facts and of his rights against the trustee |
Acquiescence | The beneficiary, on the same conditions, subsequently acquiesced in the breach |
The conditions are strict. Consent must be free and informed: knowledge of the facts alone is not enough; the beneficiary must also know his rights against the trustee. A minor or a person of unsound mind cannot concur. And the bar operates only against the beneficiary who concurred or acquiesced; other beneficiaries keep their full rights. Section 68 adds that where a beneficiary has joined in a breach, his interest can be used to indemnify the trustee and his co-beneficiaries (Topic 28).
3. Interest
A trustee committing a breach is not liable to pay interest except in the cases listed in Section 23:
Case | Liability |
|---|---|
(a) He has actually received interest | To account for the interest actually received |
(b) The breach consists in unreasonable delay in paying trust money to the beneficiary | Simple interest at six per cent per annum, unless the court directs otherwise |
(c) He ought to have received interest but has not | Simple interest at six per cent per annum, unless the court directs otherwise |
(d) He may fairly be presumed to have received interest | Simple interest at six per cent per annum, unless the court directs otherwise |
(e) The breach consists in failure to invest trust money and accumulate the interest or dividends | Compound interest, with half yearly rests, at the same rate |
(f) The breach consists in employing trust property or its proceeds in trade or business | At the beneficiary's option, either compound interest with half yearly rests at the same rate, or the net profits made by the employment |
Clause (f) is the most significant. A trustee who uses trust money in his own business must account, at the beneficiary's election, for either compound interest or the actual profits. The beneficiary will choose whichever is larger. This reflects the principle that a trustee must not profit from the trust (Section 51; Topic 24). The statutory rate of six per cent is a default; courts have power to direct otherwise, and in modern conditions often award interest at rates reflecting the market.
4. No Set-off (Section 24)
Section 24 (no set-off allowed to trustee) A trustee who is liable for a loss occasioned by a breach of trust in respect of one portion of the trust property cannot set off against his liability a gain which has accrued to another portion of the trust property through another and distinct breach of trust. |
If a trustee makes two unauthorised investments, one losing ₹5 lakh and the other gaining ₹3 lakh, he must make good the full ₹5 lakh loss; the ₹3 lakh gain belongs to the trust anyway. The rule prevents a trustee from gambling with trust property and keeping the winnings to cover the losses. The key words are "another and distinct breach". Where gains and losses arise from the same breach or the same transaction (for example, a single unauthorised portfolio managed as one), courts may take the net result into account.
5. Exemption Clauses
A trust instrument may limit the trustee's liability, for example by excusing liability for loss not caused by his own wilful default. Section 15 expressly contemplates a "contract to the contrary", and Section 30 applies "subject to the provisions of the instrument of trust". Such clauses are generally effective, but courts construe them strictly, and a clause cannot protect a trustee against liability for fraud or dishonesty, which would contradict the core obligation that makes the arrangement a trust. English law reached the same conclusion in Armitage v Nurse (1998).
⚠ Key point A trustee who commits a breach of trust is personally liable to make good the loss the trust property or the beneficiary sustained, whatever his good faith (Section 23). He is not liable to a beneficiary who fraudulently induced the breach, or who, being competent and free, concurred in it or acquiesced with full knowledge of the facts and his rights. Interest is payable only in the listed cases: interest actually received; simple interest at six per cent for delay, failure to receive or presumed receipt; compound interest for failure to invest and accumulate; and, for use in trade, compound interest or profits at the beneficiary's option. A gain from another and distinct breach cannot be set off (Section 24). |
6. Related Topics and Provisions
- Co-trustees (Topic 18): joint and several liability and contribution under Section 27
- Protection and indemnity of trustees (Topic 19): Sections 25, 28, 29, 30 and 33
- Liabilities of beneficiaries (Topic 28): Section 68
- Civil remedies for breach of trust (Topic 37) and criminal breach of trust (Topic 38)