Tag: Legal Authority

Accounts for Trustees and Executors are opened in a fiduciary capacity, where the account holder manages funds or assets on behalf of beneficiaries or an estate. Trustees operate under a Trust Deed (for living trusts) or a Will (for testamentary trusts), while Executors administer a deceased person’s estate as per the Will or succession laws. The bank’s relationship is with the fiduciary personally, but the funds belong to the beneficiaries/estate. Strict verification of the fiduciary’s legal authority, adherence to the trust’s purpose, and protection against wrongful payments are paramount, governed by the Indian Trusts Act, 1882.

Opening Accounts of Trustees and Executors:

Opening these accounts requires rigorous verification of the fiduciary’s legal authority, as the banker’s primary relationship is with the individual trustee/executor, who manages third-party funds. Due diligence is essential to prevent misappropriation and ensure transactions strictly adhere to the governing instrument.

1. Verification of Legal Authority

For Trustees, the bank must examine the original Trust Deed or a certified copy, verifying its validity, the identities of trustees/settlor, and the trust’s purpose. For Executors, probate (court-granted) or Letters of Administration (if no will) are mandatory proof of authority. The bank confirms the document is genuine, unstamped, and registered if required. Operating without proper authority risks the banker being liable for breach of trust.

2. Mandate & Specimen Signatures

The account is opened in the name of the fiduciary in their official capacity, e.g., “A as Trustee of B Trust” or “X, Executor of the Will of Y.” A formal mandate is taken, specifying who can operate the account (single/joint trustees) and their specimen signatures. For multiple trustees, the mandate should clarify if all must sign or if some are authorized singly, as per the trust deed or court order.

3. KYC of Fiduciary & Understanding the Instrument

Full KYC is conducted on the trustee/executor (not the beneficiaries). Crucially, the banker must read key clauses of the Trust Deed/Will to understand powers: investment limits, permissible withdrawals, and purpose of funds. This helps detect ultra vires transactions later. The bank should retain a copy of the instrument for reference.

4. Precautions for Discretionary Powers & Death/Retirement

If trustees have discretionary powers (e.g., distributing income among beneficiaries), the bank must ensure payments are made to legitimate beneficiaries as per trustee instructions, without questioning their discretion. The bank must also note provisions for appointment of new trustees or death of an executor, requiring fresh authority documents before allowing continued operations.

5. Indemnity & Bank’s Protection

Given the high-risk nature, banks often require a trustee/executor to sign an indemnity protecting the bank for acting on their instructions, provided the bank acts in good faith. The bank is protected if it follows the mandate and the instrument, but loses protection if it knowingly allows a breach of trust (e.g., paying funds to the trustee for personal use).

6. Distinction from Personal Accounts

The banker must strictly segregate these accounts from the fiduciary’s personal accounts. No set-off should be exercised between the trust/estate account and the trustee’s personal debt to the bank. All correspondence and statements should clearly reflect the fiduciary capacity to avoid confusion and legal complications.

7. Monitoring & Reporting

While the bank is not required to monitor the fiduciary’s duties, it should be alert to suspicious activity—like large, unusual withdrawals not aligning with the trust’s purpose—and may inquire discreetly. For estates, the account is typically temporary until distribution, and the bank should ensure proper closure upon production of a final discharge from beneficiaries/court.

8. Tax & Regulatory Compliance

The account must be opened with the Tax Deduction and Collection Account Number (TAN) of the trust/estate, and the Permanent Account Number (PAN) of the trustee/executor. The bank must ensure compliance with Income Tax Act provisions for trusts and PMLA reporting, treating the trust/estate as a separate legal entity for reporting purposes.

Operating Accounts of Trustees and Executors:

Operating these accounts requires the bank to strictly follow the authority granted by the trust instrument or probate, ensuring all transactions are for legitimate trust or estate purposes. The bank must act on valid instructions while guarding against any misuse of fiduciary funds.

1. Acting on Proper Mandate & Signatures

Every transaction must be authorized as per the original mandate and documented specimen signatures. For withdrawals or payments, the bank must verify that the signing trustee(s) or executor(s) are those authorized in the trust deed or court grant. If the mandate requires joint signatures of multiple trustees, a payment on a single signature constitutes negligence, making the bank liable for any resulting loss to the beneficiaries.

2. Ensuring Payments Align with Trust Purpose

The bank must ensure that cheques and payment instructions are consistent with the object of the trust or estate. For instance, payments for a school education trust should logically relate to educational expenses. While the bank is not required to scrutinize every transaction minutely, it must question and may refuse obviously ultra vires or suspicious payments (e.g., large personal loans to a trustee), as paying such amounts is a breach of trust.

3. Handling Death, Retirement, or New Appointment

The operation must immediately reflect changes in the fiduciary body. On death or retirement of a trustee, the account should be frozen until new authority (a Deed of Appointment or court order) from the surviving/continuing trustees is provided. For executors, the death of a sole executor terminates authority; a new legal representative must be appointed by the court. Operating on stale authority invalidates the bank’s protection.

4. No Right of Set-Off with Personal Debt

A fundamental rule: the bank cannot exercise a right of set-off. It cannot adjust a credit balance in the trust/estate account against a personal debt owed by the trustee or executor to the bank. These funds are not the fiduciary’s personal property but are held in a representative capacity for the beneficiaries. Doing so would be a conversion of trust funds, making the bank liable.

5. Recording Discretionary Powers

If the trust deed grants discretionary powers (e.g., to distribute income among a class of beneficiaries), the bank should note this internally. The bank’s duty is to honour payments made to beneficiaries as instructed by the trustees, without questioning the fairness or reason behind their discretionary decision, provided the payment is not manifestly fraudulent or contrary to the deed’s terms.

6. Receipt of Court Orders & Legal Bars

Upon receiving a court order (e.g., injunction, attachment order) related to the trust property or estate, the bank must immediately comply, typically by freezing the account. Similarly, any notice of dispute among trustees or beneficiaries should prompt the bank to seek legal advice and may require operations only on joint instructions or a court order to avoid taking sides in the dispute.

7. Investment & Reinvestment Transactions

Trust deeds often specify permissible investments. When trustees instruct the bank to invest or reinvest trust funds (e.g., buying securities, transferring to deposits), the bank must ensure the instruction is valid and the investment type is allowed. The bank acts as an agent in executing these instructions but does not advise on their prudence.

8. Final Distribution & Account Closure

For estates, the account is temporary. Upon completion of administration, the executor will request a final distribution. The bank must require a proper indemnity or court order showing clearance from beneficiaries and tax authorities before releasing the final balance and closing the account. For trusts, closure occurs upon termination of the trust as per the deed, requiring similar due diligence.

Banker’s Liability for Misdirection of Trust Funds:

A banker handling trust/estate accounts assumes a duty of care to ensure funds are not misappropriated. Liability arises if the banker, with knowledge or due to negligence, facilitates a payment that constitutes a breach of trust, making them liable to the beneficiaries for the loss suffered.

1. Liability for Knowing Assistance in Breach of Trust

The banker is personally liable if they knowingly assist a trustee in misappropriating funds. This occurs when the bank is aware (actual or constructive notice) that a transaction is a breach—e.g., transferring trust money to the trustee’s personal account for clear private use. “Knowing” includes willfully shutting one’s eyes to obvious facts. The banker becomes a constructive trustee and can be sued by beneficiaries for the full amount misdirected.

2. Liability for Negligence (Failure in Due Diligence)

Even without direct knowledge, a banker can be liable for negligence if they fail to exercise reasonable care expected in operating such accounts. This includes honoring cheques with obviously suspicious endorsements, ignoring mandates requiring joint signatures, or processing payments that are patently inconsistent with the trust’s purpose (e.g., a large payment to a casino from an educational trust). Negligence breaches the duty to protect the fund, creating liability for resultant losses.

3. Protection under “Payment in Due Course“

The banker is protected if payment is made in due course—i.e., in good faith, without negligence, and in accordance with the mandate. If the trustee improperly issues a cheque to a legitimate third-party beneficiary, the bank is not liable merely for following the authorized instruction. The bank is not required to monitor the propriety of every transaction, only to act without negligence on the face of the instructions and documents.

4. No Right of Set-Off as a Safeguard

A critical rule to avoid liability: the banker must not exercise a right of set-off between the trust account and the trustee’s personal indebtedness. Using trust funds to settle the trustee’s personal loan is a clear conversion of trust property. This act alone establishes liability for misdirection, as it directly appropriates beneficiary funds for an unauthorized purpose, regardless of the banker’s intent.

5. Duty upon Notice of Dispute or Suspicion

Upon receiving clear notice of a dispute among trustees/beneficiaries or suspicion of malfeasance, the banker must act with extreme caution. Continuing to allow operations as usual may be deemed collusion. The prudent step is to seek joint instructions from all parties or obtain a court order, effectively freezing unilateral actions. Ignoring such notice can lead to liability for any subsequent misdirection.

6. Liability for Following Invalid Instructions

If a trustee’s authority has terminated (due to death, removal, or expiration of probate) and the bank continues to honour instructions, it is liable for misdirection. Similarly, acting on instructions beyond the powers granted in the trust deed (e.g., investing in unauthorized securities) can create liability if the bank was or should have been aware of the limitation through proper scrutiny of the deed.

7. Recovery and Contribution Rights

If held liable, the banker may have a right of contribution or indemnity against the fraudulent or negligent trustee personally, provided the trustee has assets. However, this is a separate legal recovery action and does not absolve the banker’s primary liability to the beneficiaries. The banker’s claim ranks alongside other creditors of the defaulting trustee.