TMI Blog1964 (3) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... 957 with the company. The second sum of money claimed was a sum of Rs. 1,17,350.65 nP. which was described as the balance due on August 10, 1959, in a running account. The small sum of money that was claimed in the supplemental affidavit was Rs. 261.10 nP., which was stated to be due towards commission on sale of carpets and fabrics effected by the respondent firm. On September 14, 1960, the liquidator accepted the proof of the claim relating to the trust money and also the claim to the extent of Rs. 1,14,892.29 nP. in respect of the claim made on the basis of the running account. The proof in respect of the rest of the claim was rejected. From this decision of the liquidator, in so far as it concerned the rejection of a portion of the proof produced by the firm, there was an appeal to this court under rule 164 of the Companies (Court) Rules, 1959. By an order made on July 27, 1961, that appeal was dismissed, but the claim made by the firm that it was entitled to preferential payment of the debts, proof in respect of which had been accepted, was left undecided. This court directed an adjudication on that matter by the official liquidator. On January 18, 1962, the official liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen from the report submitted by the official liquidator on January 12, 1960, to the company judge, that the company was incorporated in the year 1936, with a view to find a profitable and steady outlet to the silk waste which was a by-product of silk reeling industry in the country. The management of the company was originally entrusted to a board of directors consisting of nine directors including a chairman. By reason of the large advances made by the Government of Mysore, when the company commenced its business, the Government had the power to nominate three persons to the board. It had also the power to nominate its own chairman amongst those three. Some time during the year 1950, there was an agreement entered into between the respondent firm and the company, under which the respondent became the sole selling agent of all the filature silk manufactured by the company. During a brief period, the firm also became the sole selling agent of the other products of the company on a commission which varied between 2 % and 4%. Some time in March, 1952, the agency in respect of the other products of the company came to an end, and, according to the affidavit produced by the firm, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction and manufacture and that the firm was able in that way to purchase goods from the company at arbitrary prices, and that the production programme was similarly regulated by the respondent firm which had become the sole financier of the company, was the allegation made in respect of the plea that there was exercise of undue influence and duress on the part of the respondent firm over the managment of the company. On the basis of these facts, what was urged before Narayana Pai J. was that quite enormous profits have been made by the respondent firm in pursuance of a clandestine agreement entered into between the management and the firm while the outstandings due to the firm were shown as still remaining due. Narayana Pai J. was of the view that it was impossible for the appellant to sustain the contention that the indebtedness of the company to the firm was not real. It was not disputed before him that at all times when the company's affairs were in a state of crisis, the respondent firm did make advances so that the company could carry on its affairs and continue its business. The official liquidator, who examined the books of account maintained by the company, stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral statement that no reliance could be placed on the books of account maintained by the company no doubt amounts to attaching suspicion to both the credit and debit entries in the company's books. So far, however, as the truth of the creditor's claim that he did make advances represented by the credit entries found in the company's books is concerned, the evidence, on which the creditor relies or on the strength of which he supports his claim of having made those advances, does not consist merely in the fact that there exist certain credit entries in the company's books in his favour. The creditor made payments into the bank account of the company or issued cheques drawn on his own bank account in favour of the company. Hence, he could rely and did rely before the liquidator on entries in the bank pass-books of the company and the" cheques drawn by him as well as on the challans or paying-in-slips issued by the company's bank evidencing payments having been made by the creditor into the company's bank account. No suspicion is sought to be cast on this category of evidence relied upon by the creditor. Indeed, Mr. Ullal, learned counsel for the petitioning creditor, did not say that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, accept proof of the debt under the Companies (Court) Rules, 1959, is also similarly under a duty to make a judicial determination in regard to that matter. Mr. Ullal maintained that, in the course of such determination, the official liquidator has a duty to make a full and thorough investigation into the truth of the indebtedness and to satisfy himself that the debt is real and just and that there was consideration which flowed in respect of that debt from. The creditor to the company. It is a firmly established rule that when a creditor makes a claim that a debt was due to him by the insolvent, neither the admission made by the insolvent that the debt was due, nor even a judgment obtained by the creditor against him, can conclude the matter. The official receiver in insolvency proceedings and the official liquidator under the Companies Act are under an obligation to satisfy themselves, notwithstanding the admission or the judgment, that there was a real debt payable to the creditor and whether there is any circumstance of suspicion excited by the surrounding facts and circumstances which require a fuller probe into the matter. The extent of such probe and the necessity for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h I will endeavour to express shortly thus: Suppose there were no account stated, no covenant or no judgment, and that the creditor brought his action for the amount of the debt, the defendant in the action would be entitled to say to him, 'Prove your case, vouch your payments, shew me your books, give me such discovery as I, as defendant in the action, am entitled to before you get judgment in the action,' and in that sense he is entitled to say, 'I do not say that your claim is fraudulent or collusive, but I will say that it rests with you to prove it. Satisfy me that it is right.' Of course that results in this, that the man must produce his books or vouch his payments, and must, in short, make out his case. I think the trustee is entitled in every case, whether there be account stated, covenant or judgment, to say to the creditor who comes into the bankruptcy to prove, ' Very well, you say you are a creditor; make out your case as if there was no account stated or no covenant or no judgment. Satisfy me that the amount for which you say you are creditor is right. That, of course, must be done reasonably." It is thus clear that the official liquidator in the case before us ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant's contention that the management of the company was everything that it should not have been. The first was. a report made by a committee which was called the Central Silk Board Technical Survey Team. The second was the memorandum of discussion which the special officer. Efficiency Audit, had with the chairman of the company. According to the first document, there were as many as six reasons which contributed to the tottering condition of the company in which it was found when that report was made in the year 1959. The low share capital and want of necessary provision towards working capital, the purchase and sales policy of the company which was unrelated to direct control over suppliers of raw materials, dependence on certain regular suppliers who were in a position to extend credit facilities to the company, the inability on the part of the company to make purchases of proper quality and quantities, payment of commission at high rates, non-adherence to a regular programme of production and low production efficiency were those causes, according to the report. The only matter which emerges from the memorandum of discussion which the special officer of the Efficiency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been, nor was evidence given that there was any secret understanding between the firm and the management that the firm should be debited with a smaller price than it normally would have been liable to pay. The only material to which our attention was drawn is annexure III in the report of the Technical Survey Team in which it is shown that in respect of the sale proceeds between April and June, 1957, whereas the cost of production was Rs. 42,530 for each point of such silk, the selling price was only Rs. 38,250. But it is seen from annexure II that, on another occasion, the selling rate was higher than the cost price. It may be that on some occasions the cost price was higher than the selling price and that may be due to the fact that there was no market for the goods manufactured by the company. But to point out one solitary occasion on which the cost price was higher than the selling price and depend upon it as a circumstance supporting the charge that there was a systematic under-valuation of the goods, and that that under-valuation was in consequence of some kind of oblique understanding between the firm and the company is, in my opinion, going too far. In a case like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l liquidator was also before the company judge, and there is nothing in that report, so far as I am able to see, which could have been of any assistance to the appellant. What the appellant next proposed to do was to examine an official of the Silk Board to show that there was no foreign competition worth mentioning during the relevant period. In my opinion, evidence of that character can have no relevance. What was next proposed was to examine an official of the State Bank of Mysore to show the manner in which the company was operating on its accounts and that it had exhausted its credit between the years 1952 and 1958. That was again a matter which would not to any extent diminish or decrease the indebtedness of the company. What the appellant next wanted was to examine the letters of instruction issued by the company to persons from whom it purchased goods, directing them to go to the respondent firm and obtain payments and that such payments related to very small amounts. May be, it was so. But what I do not understand is, how the fact that the respondent firm came to the succour of the company on such occasions can be of any significance. The affidavits of the firm produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than fully established. What happened on the occasion of this deposit was that the firm first requested the company to debit its own account in a sum of Rs. 50,000 and treat that sum of money as a deposit made by the firm. But this instruction was countermanded by the letter addressed by the firm on March 25, 1957, by which the company was informed that a sum Rs. 50,000 had been remitted to the current account of the company with the Bank of Mysore, Ltd., and that that sum of money should be treated as a deposit. In consequence, a receipt bearing the date March 26, 1957, was issued by the company to the firm, which reads : "Received with thanks from Shah Harilal Bhikabhai Sons, 83, Mamulpet, Bangalore-2, the sum of Rupees Fifty Thousand only on account of Filature Silk Deposit a/c Bank Challan on the Bank of Mysore Ltd., H.O." There can thus be no doubt that there was a deposit made by the respondent firm with the company of a sum of Rs. 50,000 on March 25, 1957. It is thus clear that the official liquidator was right in reaching the decision that the proof of the debt of Rs. 50,000 was likewise acceptable. The appellant cannot, therefore, ask us to expunge that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm has allowed that matter to rest there. However that may be, what is clear beyond doubt is that at least a sum of Rs. 1,06,983.82 nP. was advanced by the respondent firm towards wages and salaries and that the sum was paid by way of wages and salaries for the months of September, October and November, 1958. The question is whether in respect of that sum of money, the respondent firm is entitled to priority. What creates a right of priority is section 530(4) of the Companies Act. Before setting out the provisions of this sub-section, it would be necessary to point out that section 530 creates a right of more than one category to preferential payment. We are concerned in this appeal with sub-section (1)( b ), sub-section (2) and sub-section (4) of this section. These parts of the section read as follows: "530. (1) In a winding up, there shall be paid in priority to all other debts ( b ) all wages or salary (including wages payable for time or piece-work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priority in a creditor who advances money for the payment of wages or salary or holiday remuneration to an employee of the company, or, in the event of his death, to his legal representative. It, of course, insists that before a right of priority could be claimed, it should be established that the creditor advancing money, advanced it for the purpose of such payment* What it next does is to limit the amount in respect of which that right of priority could be claimed. Although the language of sub-section (4) is 4 little involved, its meaning, however, is unambiguous. What it says is that the maximum amount in respect of which the right of priority could be claimed is the amount by which there is a diminution of the liability of the company by reason of the payment of wages or salary or holiday remuneration out of the amount advanced by the creditor. In simple language, what the sub-section means is that the only amount in respect of which a creditor could claim a preferential payment is that the amount which has been applied by the company towards payment of wages or salary or holiday remuneration and in respect of which if it had not been paid, the employee or his legal represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vency as to preferential payment must be considered to be a supplementary provision regulating preferential payments. The argument maintained before us by Mr. Advocate-General was that if the deposit made is impressed with the character of a trust and so becomes trust money, that money does not vest in the official receiver under the law of insolvency and, therefore, does not vest in the liquidator under the Companies Act. It is clear that if the deposit was trust money, that money does not vest in the official receiver under the law of insolvency and, therefore, does not vest in the liquidator under the Companies Act. It is clear that if the deposit was trust money as contended, it, of course, does not vest in the official liquidator since that is how we should understand action 529 of the Companies Act read with the relevant provisions of the insolvency law. Mr. Ullal appearing for the appellant does not also dispute the proposition that if the deposit was trust money, it did not vest in the liquidator and the respondent firm would be entitled to preferential payment of that amount. Now section 52 of the Presidency Towns Insolvency Act contains an express provision that a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the deposit made on March 25, 1957, did not also carry interest. The question is whether this deposit was impressed with the character of a trust and whether it was trust money. There was, at one stage, a view taken by the High Courts of Allahabad, Bombay and Lahore that if a security deposit was made by an agent or an employee and that deposit earned interest or had been mixed up with the other assets of the employer or the principal, the deposit was a loan and there was no relatienship of a trustee and beneficiary (see Maneckji Petit Manufacturing Co. Ltd., In re [1933] 3 Comp. Cas. 50 ; Malvankar ( G. K. ) v. Credit Bank of India Ltd. [1915] 27 I.C. 343 , Ram Chand v. Mohd. Akram Khan Sahib AIR 1937 Lah. 444 and Maheshwari Brothers v. Official Liquidators, Indra Sugar Works Ltd. [1942] 12 Comp. Cas. 75 In a later decision of the High Court of Bombay in the National Petroleum Company Ltd. v. Popatlal Mulji [1936] I.L.R. 60 Bom. 954. Chief Justice Beaumont was having before him a case in which there was an express term in the contract that "the company shall be entitled to utilise and use the deposit whether in cash or Government securities". The learned Chi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of another and the owner." That a deposit made by an agent with the principal for the fulfilment of the terms of an agency agreement is made because he reposes confidence in the principal which is accepted by him and that the acceptance of that confidence is for the benefit of the agent cannot, in my opinion, be disputed. When an agent deposits for that purpose a sum of money with the principal, the principal holds that money in trust for the agent and agrees to do so, and the agent, on the termination of the contract of agency, is entitled to claim the payment of that money which is clearly impressed with the character of a trust. That is the principle which was accepted in all the later decisions to which I have referred, and in Fazalbhai Mills Ltd. In re [1936] 6 Comp. Cas. 351 the sum of money was a provident fund to which the employees were entitled. I am, therefore, clearly of the view that the deposit made by the respondent firm in this case was clearly impressed with the character of a trust, and so did not vest in the official liquidator and could not be distributed among the creditors of the company. The respondent firm was thus plainly entitled to preferential p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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