The Nature of Beneficiary's Rights under Indian Trust Law [ Foundations of Indian Trust Law #1]

Anirud Raghav S U |

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“Our principle is simply this — uniformity when you can have it; diversity when you must have it; but in all cases certainty.” — Macaulay (on the Indian Codification Project) 

I.              Introduction

This is the first piece in a series of pieces on trust law. The objective of this post is to identify the nature of a beneficiary’s rights under Indian trust law: whether it is proprietary, personal or sui generis. To begin with, it might be helpful to contrast the definition of a trust under Indian law with that under English law.

Let us consider the English trust as defined by Underhill and Hayton:[1] 

“A trust is an equitable fiduciary obligation, binding a person (called a trustee) to deal with property (called trust property) owned and controlled by him as a separate fund, distinct from his own private property, for the benefit of persons (called beneficiaries or, in old cases, cestuis que trust), of whom he may himself be one', and any one of whom may enforce the obligation”

Now contrast this with the definition of a trust under s.3 of the Indian Trusts Act (‘ITA’):

“A “trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.”

In addition, s.3 also defines the “beneficial interest” or “interest” of the beneficiary as his (i.e., beneficiary’s) right against the trustee as owner of the trust-property.

The inquiry in this article is whether s.3’s definition of beneficial interest imports a personal, proprietary or a sui generis nature of the beneficiary’s rights in the trust. In this article, I will show that the beneficiary’s rights are not solely personal; it is better thought of either as indirectly proprietary or as a right against a right (acknowledging that the two are different). I do this by firslyt, distinguishing between personal and proprietary remedies; secondly, I lay bare the three points of view: personal, proprietary and a right against a right. Both the proprietary and the personal rights view seem to have some difficulties. The right against a right view, however, seems to deal with these fairly well. But existing debates continue on whether the right against a right view is nothing but an indirect proprietary right.

II.            Personal and Proprietary Remedies

At an elementary level, personal and proprietary remedies differ in their source and consequences. By source, personal remedies are asserted against the individual who undertakes them, and do not arise from the property itself. In this sense, the source of a personal remedy is an agreement to perform a personal obligation. Illustratively, if you enter into a contract with me to sell cricket bats and you do not, I have a personal remedy against you: the personal speaks to the fact that your obligation is personally owed only to me, and correspondingly, that my right is limited only to have that obligation enforced against you. This is why contractual agreements typically entitle one only to a personal remedy (whether damages, specific performance etc.)—it can only be enforced against the person who undertook to perform obligations. Seen this way, we now also understand the doctrine privity of contract (M.C. Chacko v. State Bank) in its proper context: I can assert a contractual right against you only against you and no one else; in that sense, it is personal. One can think of these, therefore, as in personam rights and obligations.

As against this, proprietary remedies, by source, arise from my interest in the property in question. Popularly, these are referred to as in rem rights and obligations, since they do not respect the person in whose hands the property lies, but rather concerns rights against the property itself. By way of example, assume that you own a house. Irrespective of who interferes with the house, you are entitled to maintain an action of trespass, seeing as your right is as against your house. In this sense, it is in rem: exigible against the world.

Generally in commercial law, the personal and proprietary remedy distinction becomes important especially in an insolvency context. Typically, if a right to the property can be established, one gets priority over creditors. In a trust context, the cases of Quistclose trusts (with all their controversy) are a prime example: a lender, to claim back all the advanced money, would much rather want to be classified as an beneficiary of a trust rather than an ordinary creditor, since he would then get priority. For our discussion on the rights of a beneficiary, the personal-proprietary distinction is of capital importance—it will determine whether his rights are against the trust property, or simply against the trustee, who owns such property.

III.          The Indian Beneficiary and his “beneficial interest”: Personal, Proprietary or Sui Generis?

The term ‘beneficial interest’ has its origin in English property law. English law follows a system of dual ownership: while the trustee is the legal owner, the beneficiary has a beneficial or equitable interest in the trust-property. This apparent division between ownership has its genesis in how trusts were historically administered in England. The trustee would be the sole owner at common law; but when he acted in breach of trust or failed to carry out trust obligations, the beneficiary could assert no rights against the trustee in common law courts for want of title (i.e. they had no discernible interest in the property, being a stranger to the settlement between the settlor and the trustee). They thus took recourse to Courts of Equity, which devised the beneficial or equitable title as the legal fiction that allowed beneficiaries to assert a claim against the trustee. Thus, there is nothing inherently organic about the legal-beneficial title division; it is, in many ways, a quirk of history. This would become important later, in discussing the proprietary and personal dimensions of the trust relationship.

For now, it suffices to understand that for all legal purposes, the trustee owns the property; if the property had to be leased, or any suit had to be instituted in respect of the law, the trustee would be the relevant actor and not the beneficiary. The beneficiary’s beneficial interest is usually asserted to require the trustee to do or not do something with the trust property. This might give the impression that the beneficial interest in only personal in nature. This is incorrect.

I submit in the next section that both personal and proprietary remedies seemingly flow from the Indian Trusts Act; yet, neither the personal right nor the proprietary rights view adequately accounts the ways in which the beneficiary’s rights turn out in practice. The ‘right against a right’ view more satisfactorily accounts for this. While there is little novel in this suggestion, I will show how the Indian Trusts Act conceptualizes and operationalizes this.

Before examining the three views, an important caveat has to be issued. India sought to move away from the dual-ownership model in England,^[2] intending to abolish the distinction between a legal owner (trustee) and a beneficial owner (beneficiary). Instead, ownership vested wholly in the trustee and the beneficiary’s beneficial interest (as defined above) is articulated as a personal claim against the trustee. This was recognized by some initial judgments (here, here, here and here). But this clarity was lost on some judgments. In any case, some authors advocate for principled understanding that the Indian trust law intends for all ownership of the property to vest only in the trustee. In this background, how should we view the beneficiary’s rights in a trust? Primarily, three possibilities appear.

a)    Personal right

The first argument is that the beneficiary’s rights are personal in nature. This means that the beneficiary can only sue the trustee in personam. This means, among other things, that the trustee can be sued for breach of trust under s.23 of the ITA. But it means also that the beneficiary does not have any rights as against the property; his rights are as against trustee personally. The statutory backing for this view might draw from the definition of beneficial interest under s.3: ‘a right against the trustee as owner of the trust-property’. Stokes, in his seminal Anglo-Indian Codes, notes:

‘And to prevent the introduction into the Mufassal of conceptions resembling the English legal estate and equitable ownership, the ‘beneficial interest’ of the beneficiary is defined as ‘his right against the trustee as owner of the trust property.’ Under the Act, the beneficiary has no estate or interest in the subject-matter of the trust. ‘Breach of trust’ is the breach of any duty imposed on a trustee as such by any law for the time being in force.’[3]

The personal right thesis was also endorsed by Maitland in his timeless lectures on equity. The personal rights view arose primarily out of opposition to the idea that there could be competing owners in equity and common law. Yet, the personal rights account, as things play out practically,  is insufficient for two reasons. First, it fails to explain s.63 of the Indian Trust Act, which appears to be in the nature of a proprietary remedy (although this characterization is scrutinized in greater detail later):

63. Following trust-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.

into that into which it has been converted.—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.

This is a proprietary remedy, involving following and tracing respectively. There is nothing personal about this remedy: the beneficiary asserts a right directly against a third person. The trustee, the alleged in personam subject of any suit under this view, has no role to play. Thus, the personal rights view at least fails to explain why the beneficiary is able to exercise a seemingly proprietary right. Second, the personal rights view does not explain why the beneficiary takes priority during the trustee’s insolvency: see s.36(4)(a)(i) of the Insolvency and Bankruptcy Code. If the right is merely personal, the beneficiary should rank alongside an unsecured creditor; but this is not so. Third, it also fails to explain the Saunders v. Vautier rule (codified in s.56 of the Trusts Act): that the beneficiaries can demand that the trustee transfer the property to them. In sum, the personal rights view has serious difficulty explaining the beneficiary’s rights as they turn out in Indian law. Does this mean that beneficiary’s rights are proprietary?

b)    Proprietary right

As we saw above, the personal rights view falls short. We may now consider the proprietary rights view, which already does much better by being able to explain Saunders v. Vautier, as well as the beneficiary’s priority during the trustee’s insolvency. Indeed, it is the orthodox conception in English judicial decisions today, despite much academic debate. However, two major attacks are inveighed against this view.

First, that it does not explain modern day trusts where personal rights are held in trust. Justice Edelman of the Australian High Court says:

Perhaps the most fundamental difficulty of speaking of a beneficiary under a trust as an equitable 'owner' of the trust assets is that personal rights can be held on trust as well as property rights. Indeed, most modern commercial trusts are comprised of personal rights. Consider a trust which comprises of 'money'. The trust asset held by the trustee is a personal right, a debt, (usually) against a bank. It is a nonsense to speak of the trustee 'owning' the debt. It is even more of a nonsense to speak of the beneficiary, unknown to the trustee, owning the debt which is owed to the bank. As Cotton and Lindley LJJ said in Lister & Co v Stubbs in a context considered later in this paper, this confuses ownership with obligation.

This argument has earlier origins, having been written about by Stevens and McFarlane.[4] One way of dealing with this argument is simply to say, at least under Indian law, that such debts are actionable claims capable of being transferred under s.3 read alongside s.130 of the Transfer of Property Act, 1882. The concept of ‘owning debt’ and ‘selling such debt’ to another party is perhaps not as controversial as the above statement makes it seem: the factoring of receivables follows precisely the same pattern. You owe me money. That money is your debt to me. I sell your debt to a third party (say, a bank), at a slight discount and I immediately get money. Your debt is now owed to them, whether you have notice or not (see s.130 of the Transfer of Property Act).

The second argument against proprietary rights is more forceful: the proprietary rights view does not explain why (in English law at least) the beneficiary cannot sue in tort a third-party trespasser with the trust property. This right lies solely with the trustee. This has prompted reconsideration of the proprietary rights view: after all, if the beneficiary’s rights attach to the property, surely he must be able to sue the trespasser.

A third argument, specific to the Indian context (and broadly, civilian jurisdictions), is that the law vests the ownership of the property entirely to the trustee. What, then, is the source of the beneficiary’s ‘proprietary’ rights? In English law, this depended on the invention of an equitable proprietary right or an equitable title. But we noted above that Indian law has decided consciously to abandon any analogue of a beneficial title.

At first blush, this serves to categorically dismiss the proprietary rights view—at least as a matter of legislative design. However, this crucially leaves unexplained s.63 of the ITA, a matter to which we will return later.

c)    Sui generis: A right against a right

An unorthodox, yet forceful, view is that the nature of equitable property rights (as those in trust) are neither proprietary nor personal. They are, instead, a right against a right: that is, the beneficiary’s right is the trustee’s right. An example might clarify. Assume T holds a house in trust for B. If B’s rights were proprietary, it would mean that B had a right in relation to the house itself. But this view (propounded by Stevens and McFarlane) suggests that the subject of B’s right is T’s right of ownership to the house. Now, assume that X were to tresspass the house. In the right against a right theory, B would have no right to sue X. That right only lies with T. B, however, would have a right to require T to sue X. This is because the subject of B’s right is T’s right of ownership, and with it, the right to exclude others through actions of trespass. Interestingly, Justice Edelman, McFarlane, and even Lord Burrows[5] cite the definition of trust as an ‘obligation annexed to ownership’ under Indian Trusts Act, s.3 as evidence of the right against a right theory of equitable property rights. 

The thrust for this new understanding comes from limitations with the orthodox proprietary right conception we saw above: namely, that ownership of personal claims is a ‘nonsense’ and that only the trustee can sue third parties in tort for interference with the trust property. As we saw above, the allegation goes that proprietary rights view cannot account for personal rights being held in trust. To briefly develop this idea: if X owes A a debt, it is a fact that A can hold that debt in trust for B. However, the debt is simply A’s personal right against X. Thus, A cannot settle any proprietary right in favour of B to begin with: since the right he holds against X is personal. Moreover, since proprietary rights are characterized by its rightholder’s ability to exclude others from interfering with that right (exclusivity), it makes little sense to say that B has the right to exclude anyone from interfering with the intangible right that A holds against X. Yet, debts being held in trust is commonplace. That this is true means that the proprietary right conception falls short. However, the right against a right conception holds explanatory power here: if B’s right is against A’s right to money owed by X, the consequence is that A has a duty to duly exercise his right and recover said money from X. We run into no issues of excludability here. 

The most popular counter to the right against a right hypothesis comes from exponents like James Penner. They say that the right is simply an indirect right in rem. If A has a right in rem, and B’s right is A’s right, then B’s right is effectively in rem. It is only a step removed from a direct claim against third parties, since A must sue on B’s behalf. Stevens and McFarlane reply as follows (they deal with a case where A holds a car on trust for B, and X, a third party, inteferes with A’s possession of the car):

It has been suggested that B can be seen as having an ‘indirect’ right in rem: that is, B has a right prima facie binding on anyone interfering with the car, but that right is indirect as it must be asserted through A. That suggestion must be rejected, as any ‘indirect’ claim depends not on X’s interference with the car itself, but rather on X’s interference with A’s right. For example, if A consents to X’s interference with the car then X’s interference, by itself, gives B no direct or indirect claim against X.

The right against a right view also accounts for the beneficiary’s right in insolvency. Under this view, the beneficiary’s right is persistent: this only means that it follows whoever holds rights in relation to that property. For instance, if T holds property for B, and T alienates that property in breach of trust to X (who was not a bona fide purchaser), the latter now owes the same obligations as T to B. In other words, B’s rights persist such that it carries on to X, since X’s rights in relation to the property were only derivative of T’s. Transpose this to the insolvency context: if T goes insolvent, the Resolution Professional (otherwise known as trustee-in-bankruptcy in other jurisdictions) becomes owner of all of T’s property, including the trust property. He thus gets the same rights that T had to the trust property, and along with it, the obligations annexed to such ownership: that is, those obligations owed to B. In other words, B’s right has now become T’s right to such property, and should he require so, he may exercise his right such that T now has a duty to exercise his own right to transfer the property to B. This is what we mean when we say B has priority during his trustee’s insolvency.

Let us test how this theory might apply in Indian law by looking at the language of the Indian statute. We will take the example of X, a third party, interfering with the land that T holds for B’s benefit. T does nothing, as the land continues to be trespassed. It is apparent that B cannot sue X directly: nothing in the Trusts Act so empowers B. The only way of realizing his interest is indirect: through T. So what can B do to get T to take action against X? B has two options. First, sue T for breach of trust under s.23. This is a personal remedy against T. But this is not of much use: under s.23, he is only entitled to compensation for loss that T has caused. Under this approach, B is unable to actively require T to stop X. That there is a personal remedy against T does not mean that the right against a right view fails: it is perfectly consistent that B have a personal right against T while also requiring performance of certain obligations by him. Second—and this captures the right against a right view—B is able to take recourse to s.61, and compel X to perform an act of his duty. How so, and what duty?

Note s.61:

61. Right to compel to any act of duty.—The beneficiary has a right that his trustee shall be compelled to perform any particular act of his duty as such, and restrained from committing any contemplated or probable breach of trust.

This is organized under the Chapter VI entitled ‘Of the Rights and Liabilities of the Beneficiary’. So, B can sue T compelling him to perform an act of his duty. What is his ‘duty’ though? B must establish that by taking recourse to s.13:

13. Trustee to protect title to trust-property.—A trustee is bound to maintain and defend all such suits, and (subject to the provisions of the instrument of trust) to take such other steps as, regard being had to the nature and amount or value of the trust-property, may be reasonably requisite for the preservation of the trust-property and the assertion or protection of the title thereto.

This is classified under Chapter II entitled ‘Duties and Liabilities of the Trustees’. Section 13 makes it the trustee’s obligation to preserve the trust-property. It is no great leap for B to show that a suit against X for trespassing is necessary for preservation of trust-property (in an immediate sense, the right to possession is being interfered with; in the long term, the threat of adverse possession looms large). But does T really have such a power to sue X? The answer is yes, and the source is s.36.

36. General authority of trustee.—In addition to the powers expressly conferred by this Act and by the instrument of trust, and subject to the restrictions, if any, contained in such instrument, and to the provisions of section 17, a trustee may do all acts which are reasonable and proper for the realisation, protection or benefit of the trust-property, and for the protection or support of a beneficiary who is not competent to contract.

In this manner, B will successfully secure that T sues X for trespassing the trust property. Could B ask T to sue X if T never had that right to begin with? No. At least in this simplistic sense, B’s right is as against T’s right. When B exercises his right under s.61, which is grounded in T’s duty under s.13, T is bound to use his right under s.36. A similar reasoning applies for almost every action that B takes against T: his right is as against T’s right. It is not in relation to the trust property itself. Nor is it limited to a claim solely against T in compensation; s.23 is an option but not the only option. That B cannot sue X directly and must do it through T shows the applicability of the right against a right theory in India.

Yet, the only issue this thesis has to contend with is s.63:

63. Following trust-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.

into that into which it has been converted.—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.

This is seemingly incongruent with the rights against a right thesis since the beneficiary can directly sue a third party in relation to the trust. One way to explain this is to rely on the persistent right idea: when T sells the trust property inconsistently with the trust to X, X becomes bound by all obligations in relation to such trust property.

IV.          Some Continuing Questions

A potential anomaly to the personal rights view is s.63: which seemingly codifies an ‘equitable proprietary claim’, which allows the beneficiary to sue the third party directly, instead of through a trustee. Whitley Stokes, in his commentary, does not seem to think this is particularly anomalous—he elides over s.63 as though it is an ordinary provision. It is hard to reconcile s.63 with an admitted rejection of the dual ownership model. This is because s.63 can only be explained as a proprietary remedy—it allows the beneficiary to sue the third party; he is not suing the trustee to sue a third party (as in the rights against a right thesis). He is suing because he has rights against the trust property. If the matter is only that the trustee had breached his obligation, then the suit ought to lie only against the trustee. It is however practically easy to see why this provision should exist. The purpose of a trust relationship is ultimately to benefit the beneficiary. If the trustee—the very person entrusted to hold the property for the beneficiary—breaches it, the beneficiary will be forgiven for thinking that requiring the trustee to take action is inutile. The premise of a trust relationship is the confidence that the beneficiary reposes; this confidence is lost where the trust property is inconsistently transferred to a third party. While this explains the policy behind the provision, it does not formulate a legal basis for why a beneficiary can sue a third party. That legal basis, if at all, can only lie in saying that s.63 codifies a proprietary remedy.

The lack of a comprehensive discussion on the trusts act impedes our endeavour to understand the complete nature of the beneficiary’s rights. But we might find answers by looking at other civilian jurisdictions, which omit the English dual ownership model. Particularly, the Scottish model is popularly considered a ‘mixed system’, incorporating both English and civilian principles. Comparisons with other Asian systems might generate insights on the nature of the Indian beneficiary’s rights. These are fit to be the subject of subsequent posts.

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[1] David Hayton, Paul Matthews & Charles Mitchell, Underhill and Hayton: Law of Trusts and Trustees (19^th ed LexisNexis 2016).

^[2] Stelios Tofaris, ‘Trust Law Goes East: The Transplantation of Trust Law in India and Beyond’ (2015) 36 The Journal of Legal History 299. This article is a good read to generally understand the historical underpinnings of Indian trust law.

[3] Whitley Stokes, Anglo-Indian Codes (Oxford Clarendon Press, 1887-88) 823.

[4] B McFarlane and R Stevens ‘The Nature of Equitable Property’ (2010) 4 JOE 1.

[5] Andrew Burrows, ‘We do this at Common Law and that in Equity’ (2002) 22 Oxford Journal of Legal Studies 1, 5.