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IAI Actuarial Core Principles · Business Management · Trusts and agency

Trustees Mehta and Rao hold a trust fund. Rao, who handled all banking, secretly diverted ₹6 lakh to his own business. Mehta never checked statements and left everything to Rao. The beneficiaries sue both. Which outcome is most consistent with Indian trust law principles?

Mehta may also be liable. Trustees are not automatically responsible for a co-trustee's acts, but a trustee whose own neglect or total abdication made the misappropriation possible has breached his duty. Not receiving the money himself, or partial repayment by Rao, does not remove that liability.

  1. AMehta may be liable too, because passive neglect that enabled the breach is itself a failure of dutyCorrect
  2. BMehta is automatically exempt because he did not receive the money
  3. CNeither is liable if Rao later repays in part
  4. DOnly Rao is liable, since a trustee is never answerable for a co-trustee's acts
  5. Mehta is liable only if the trust deed names him as chief trustee

Explanation

A trustee is not automatically liable for a co-trustee's wrongs, but he is liable where his own default, such as wilful blindness or neglecting supervision, made the breach possible. Mehta's total abdication facilitated the loss. Not personally receiving money does not exempt him, and partial repayment does not erase liability.

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