Following and Tracing Trust Property (Sections 63 to 67)

A claim against a trustee personally is only as good as his solvency. If he has sold the trust property, spent the proceeds or mixed them with his own money, the beneficiary needs a remedy that reaches the property and what it has become. Sections 63 to 67 provide it: the beneficiary may follow trust property into the hands of third parties, trace it into substituted assets, claim a charge over blended funds, and reach property the trustee later reacquires. The protection of the bona fide purchaser for value without notice marks the outer limit. This note explains these proprietary remedies.

1. Following Trust Property (Section 63, first part)

Section 63, Indian Trusts Act, 1882 (following property into the hands of third persons)

Where trust property comes into the hands of a third person inconsistently with the trust, the beneficiary may require him to admit formally, or may institute a suit for a declaration, that the property is comprised in the trust.

Following means pursuing the same asset as it passes from hand to hand. If a trustee wrongfully gifts trust land to his son, or sells it to a buyer who knows of the trust, the beneficiary can follow the land and require the holder to admit that it is trust property, or sue for a declaration to that effect. Once the property is declared to be trust property, the holder is bound by the trust.

2. Tracing into Substitutes (Section 63, second part)

Section 63 (following property into the hands of the trustee's representative)

Where the trustee has disposed of trust property and the money or other property which he has received therefor can be traced in his hands, or the hands of his legal representative or legatee, the beneficiary has, in respect thereof, rights as nearly as may be the same as his rights in respect of the original trust property.

Tracing means identifying a new asset as the substitute for the original. If the trustee sells trust shares for ₹10 lakh and buys a flat with the money, the beneficiary can trace the trust's value into the flat and claim rights in it "as nearly as may be" the same as his rights in the shares. The right extends to the trustee's legal representative or legatee after his death, so the claim is not lost when the trustee dies.

The value of tracing lies in priority. A proprietary claim to the flat ranks ahead of the trustee's unsecured creditors, which matters most when the trustee is insolvent. It also lets the beneficiary take the benefit of any increase in value of the substitute asset.

3. The Limit: Protected Transferees (Section 64)

Section 64 (saving of rights of certain transferees)

Nothing in section 63 entitles the beneficiary to any right in respect of property in the hands of (a) a transferee in good faith for consideration without having notice of the trust, either when the purchase money was paid, or when the conveyance was executed, or (b) a transferee for consideration from such a transferee.

A judgment creditor of the trustee attaching and purchasing trust property is not a transferee for consideration within the meaning of this section.

Good faith, consideration, no notice: all three must be present. A donee (no consideration) is bound; a buyer with actual or constructive notice (Section 3) is bound.
Timing of notice: the transferee is protected only if he had no notice either when the price was paid or when the conveyance was executed. Notice at either point defeats the protection.
Shelter rule: a transferee for consideration from a protected transferee is also protected, even if he himself has notice, so that the protected buyer can sell freely.
Judgment creditors: a creditor of the trustee who attaches and buys trust property at an execution sale is not a transferee for consideration and cannot rely on the section.

4. Reacquisition by the Trustee (Section 65)

Section 65 (acquisition by trustee of trust property wrongfully converted)

Where a trustee wrongfully sells or otherwise transfers trust property and afterwards himself becomes the owner of the property, the property again becomes subject to the trust, notwithstanding any want of notice on the part of intervening transferees in good faith for consideration.

A protected purchaser cuts off the trust (Section 64). But if the property later comes back to the wrongdoing trustee, the trust revives. The trustee cannot use an innocent intermediary to "clean" the property and then reacquire it free of the trust. The rule prevents a trustee benefiting from his own wrong.

5. Blended Property (Section 66)

Section 66 (right in case of blending)

Where the trustee wrongfully mingles the trust property with his own, the beneficiary is entitled to a charge on the whole fund for the amount due to him.

When trust money is paid into the trustee's personal bank account, it can no longer be identified as a separate asset. Section 66 solves the problem by giving the beneficiary a charge on the whole mixed fund for the amount due. The consequences are favourable to the beneficiary:

Priority: the charge ranks ahead of the trustee's general creditors over the fund.
Burden on the trustee: having created the confusion, the trustee bears the risk of it; doubts about what is his and what is the trust's are resolved against him.
Withdrawals and purchases: English law, which Indian courts often consult on detailed questions, presumes that a trustee spends his own money first (Re Hallett's Estate, 1880), allows the beneficiary to claim assets bought from the mixed fund, and limits the claim against a bank balance to its lowest intermediate balance (Roscoe v Winder, 1915).

6. Partner-Trustees (Section 67)

Section 67 (wrongful employment by partner-trustee for partnership purposes)

If a partner, being a trustee, wrongfully employs trust property in the business or on the account of the partnership, no other partner is liable therefor in his personal capacity to the beneficiaries, unless he had notice of the breach of trust.

A trustee who is also a partner in a firm may divert trust money into the firm's business. Section 67 protects his innocent co-partners: they are not personally liable to the beneficiaries unless they had notice of the breach. The beneficiary's rights against the trustee-partner personally, and his proprietary rights to follow and trace the money into the firm's assets, are not affected. Partners with notice are liable personally.

⚠ Key point

Where trust property comes into a third person's hands inconsistently with the trust, the beneficiary may follow it and obtain an admission or declaration that it is trust property; where the trustee has disposed of it, the beneficiary may trace the proceeds in the hands of the trustee, his legal representative or legatee, with rights as nearly as may be the same (Section 63). These rights do not reach a transferee in good faith for consideration without notice (at payment or conveyance), or one taking for value from him; a trustee's attaching judgment creditor is not protected (Section 64). Property reacquired by the wrongdoing trustee is again subject to the trust (Section 65). Wrongful blending gives a charge on the whole fund (Section 66). Innocent co-partners of a partner-trustee are not personally liable without notice (Section 67).

7. Related Topics and Provisions

Nature of the beneficiary's interest (Topic 6): why these rights are proprietary in effect
Key definitions (Topic 4): notice under Section 3
Protection of bona fide purchasers (Topic 32): Section 96
Trust property in insolvency (Topic 53)