Space Investments Ltd v Canadian Imperial Bank of Commerce et Al

The question is whether in the winding up of an insolvent bank trustee the liquidator must pay the trust deposit accounts lawfully maintained by the bank trustee in priority to payment of the customers' deposit accounts and the debts owed by the trustee bank to other unsecured creditors.

A customer who deposits money with a bank authorises the bank to use that money for the benefit of the bank in any manner the bank pleases. The customer does not acquire any interest in or charge over any asset of the bank or over all the assets of the bank. The deposit account is an acknowledgment and record by the bank of the amount from time to time deposited and withdrawn and of the interest earned. The customer acquires a chose in action, namely the right on request to payment by the bank of the whole or any part of the aggregate amount of principal and interest which has been credited or ought to be credited to the account. If the bunk becomes insolvent the customer can only prove in the liquidation of the bank as unsecured creditor for the amount which was, or ought to have been, credited to the account at the date when the bank went into liquidation.

On the other hand a trustee has no power to use trust money for his own benefit unless the trust instrument expressly authorises him so to do. A bank trustee, like any other trustee, may only apply trust money in the manner authorised by the trust instrument, or by law, for the sole benefit of the beneficiaries and to the exclusion of any benefit to the bank trustee unless the trust instrument other-wise provides. A bank trustee misappropriating trust money for its own use and benefit without authority commits a breach of trust and cannot justify that breach of trust by maintaining a trust deposit account which records the amount which the bank has misappropriated and credits interest which the bank considers appropriate. The beneficiaries have a chose in action, namely, an action against the trustee bank for damages for breach of trust and in addition they possess the equitable remedy of tracing the trust money to any property into which it has been converted directly or indirectly.

A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed its place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank. Where an insolvent bank goes into liquidation that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because the customers and other unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full. On the other hand, the settlor of the trust and the beneficiaries...