Case: Hukumchand Gulabchand Jain Vs. Fulchand Lakhmichand Jain And Others

ceases." The limit of interest is different under other paragraphs for loans advanced in different circumstances. Paragraph 61 repeats what has been stated in paragraph 58 of Section II and adds a special rule to the effect:"on grain, on fruit, on wool or hair on beasts of burden, lent to be paid in the same kind of equal value, it must not be more than enough to make the debt quintuple." It is, therefore, clear, as stated earlier, that the rule of Damdupat applies in respect of interest due on amounts lent by a creditor to the borrower, the debtor. The question then is whether the funds in the hands of a trustee can be said to be such loans notionally advanced by the trustee to himself as an individual. If their character can be deemed to be such, there may be a case for applying the rule of Damdupat to the interest on such funds and that if it is not so, this rule of Damdupat will not apply to the interest ordered to be paid on such funds. 33. It has been urged for the appellant that the trustee is a debtor with respect to the trust money in his hands. Reference has been made to Halsburys Laws of England, III Edition, Vol. 38, page 1044 where it is stated at para 1801 :"A breach of trust is, in equity, regarded as giving rise to a simple contract debt. " In the foot-note is stated :"Strictly speaking, the relation of debtor and creditor does not subsist between a trustee and his cestui que trust [per Lindley, L. J. in Ex parte , Taylor; In re, Goldsmid, (1886) 18 QB 295]." Lewin on Trust, 15th Edition, states at 745 :"The debt constituted by a breach of trust is, even after it has been established by a decree, an equitable debt only, and until the Bankruptcy Act; 1869, would not have supported a petition in bankruptcy." It was said by the Earl of Halsbury, L.C., in Sharp v. Jackson, (1899) AC 419 at p. 426: It has been suggested that there was a proposition which could be maintained, as to which I confess I entertain grave doubts whether any decision goes to that extent, namely, that the relation between a cestui que trust and a trustee who has misappropriated the trust fund is not that of debtor and creditor. That it may be something more than that is true, but that it is that of debtor and creditor. I can entertain no doubt. As that question has been mooted and brought before your Lordships House as one question for decision here, I certainly have no hesitation in saying that in my opinion no such proposition can properly be maintained, and that although there are other and peculiar elements in the relation between a cestui que trust and a trustee, undoubtedly the relation of debtor and creditor can and does exist." No other Lord expressed an opinion on this point. 34. The correctness of this expression of the Earl of Haslbury has been doubted in Lake, in re Dyer, Ex parte , 1901-1 KB 710, by Rigby, L. J. who remarked at the hearing :"How is a trustee a debtor? Can he be sued at common law? I do not see how he can be a debtor for the money he is fraudulently dealing with is, at law, his own money. No doubt he can be called upon to repay the money, but that must be by a suit in equity, not at law. Notwithstanding the high authority of the statement that has been referrer to, I confess I do not understand it." 35. We are of opinion that though a trustee, who has custody of trust funds, has pecuniary liability to make good those funds if he has used them and may, on the basis of such liability, be said to be a debtor of the trust, yet he, as an individual, is not a borrower of the funds from the trust and cannot be said to have taken a loan from himself as a trustee in charge of the trust funds. His liability to pay interest, when ordered by the Court on equitable grounds, does not come within the provisions dealing with interest in Hindu Law, as mentioned in Colebrookes Digest. 36. There is no fixed rate of interest which a trustee be liable to pay as there is no contract between him as a trustee and as an individual to pay interest. He simply uses the money in his custody. It is only when the Court determines his liability to pay interest that interest is to be calculated on the principal amount due from him. It is not the case of a creditor letting interest accumulate and thus make the debtor pay interest much more than what he had borrowed as principal. 37. The principle of Damdupat was evolved both as an inducement to the debtor to pay the entire principal and interest thereon at one and the same time in order to save interest in excess of the principal and as a warning to the creditor to take effective steps for realising the debt from the borrower within reasonable time so that there be not such accumulation of interest as would be in excess of the principal amount due, as in that case he would have to forego the excess amount. There may be justification for the principle of Damdupat applying in the case of an ordinary creditor and a debtor, but there seems no justification for extending that principle to the case of a trustee who has to pay interest on the funds in his hand with respect to which on certain grounds he is held liable to pay interest. We, therefore, hold that the rule of Damdupat will not apply with respect to the interest adjudged payable by a trustee on his committing breach of trust with respect to the trust funds in his hands.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]35. We are of opinion that though a trustee, who has custody of trust funds, has pecuniary liability to make good those funds if he has used them and may, on the basis of such liability, be said to be a debtor of the trust, yet he, as an individual, is not a borrower of the funds from the trust and cannot be said to have taken a loan from himself as a trustee in charge of the trust funds. His liability to pay interest, when ordered by the Court on equitable grounds, does not come within the provisions dealing with interest in Hindu Law, as mentioned in Colebrookes Digest36. There is no fixed rate of interest which a trustee be liable to pay as there is no contract between him as a trustee and as an individual to pay interest. He simply uses the money in his custody. It is only when the Court determines his liability to pay interest that interest is to be calculated on the principal amount due from him. It is not the case of a creditor letting interest accumulate and thus make the debtor pay interest much more than what he had borrowed as principal37. The principle of Damdupat was evolved both as an inducement to the debtor to pay the entire principal and interest thereon at one and the same time in order to save interest in excess of the principal and as a warning to the creditor to take effective steps for realising the debt from the borrower within reasonable time so that there be not such accumulation of interest as would be in excess of the principal amount due, as in that case he would have to forego the excess amount. There may be justification for the principle of Damdupat applying in the case of an ordinary creditor and a debtor, but there seems no justification for extending that principle to the case of a trustee who has to pay interest on the funds in his hand with respect to which on certain grounds he is held liable to pay interest. We, therefore, hold that the rule of Damdupat will not apply with respect to the interest adjudged payable by a trustee on his committing breach of trust with respect to the trust funds in his hands