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TMI Blog1963 (9) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... s court were to notify the other unsecured creditors of the company as well as the State of Mysore which is the guarantor in respect of two mortgage loans claimed by the second, respondent, the Bank of Mysore. The claim by the applicants arises out of a building contract entered into between them and the company when it was just started. The applicants are a firm of engineers and builders constituted of two partners, viz., Abdul Wajid (now no more) and B. S. Madhava. The first named Abdul Wajid was also one of the directors of the company. The building contract is represented by two documents-one called the articles of agreement with a schedule of rates annexed to it and the other called the conditions of contract. Both are dated 20th November, 1948. I shall make a more detailed reference to these documents at a later stage. It will be sufficient for the present to state that the conditions of contract contains a clause for reference to arbitration of disputes between the parties relating to the contract. The applicants after executing certain works tendered bills for payment which, according to them, were in accordance with the terms of the contract. The bills were not paid pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n filed in the District Court of Mysore for passing a decree. Further proceeding' in the District Court pursuant thereto have now been stayed by an interim order made by the Supreme Court in an appeal by special leave presented by the applicants against the order of this court in Civil Revision Petition No. 140 of 1960. The second respondent, the Bank of Mysore, is a secured creditor, the indebtedness of the company in respect of which is evidenced by two documents dated 30th October, 1949. Several attacks against the availability of security claimed by the bank under these documents were the subject of consideration in Company Application No. 45 of 1961 which was disposed of by the order dated November 2, 1962, by which it was held that the bank was a secured creditor under both these deeds. One of them, it may be stated; is a simple mortgage in respect of immovable property of the company and the other a hypothecation of machinery and other movables belonging to the company. The principal amount secured by the simple mortgage was Rs. 2,00,000 and that secured by the hypothecation is Rs. 8,00,000. All details pertaining to these documents are found discussed in the order in Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longing to the company pursuant to the building contract of 20th November, 1948. So far as prayer No. 2 directed against the Bank of Mysore is concern ed, it is also made clear that competition between the claims of the applicants and the bank has reference only to the simple mortgage for Rs. 2,00,000 in respect of immovable property, because the machinery and movables which are the subject of hypothecation for the principal sum of Rs. 8,00,000 are not claimed to be materials supplied or furnished by the applicants or items of property in respect of which they have any interest in relation to the amounts found due to them by the arbitrator. In substance, therefore, the question relates to what is described in prayer No. 1 as the equity set up by the applicants for priority of payment over all other creditors. The case of the applicant has been presented on the basis of the following propositions formulated as fully describing the equity claimed by them : "1. Having regard to the terms of the two documents setting out the building contract, the title in the materials which have gone into the structure put up by the applicants pursuant to the contract could not pass to the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly limited application, and also upon certain principles stated and English cases cited in Chapter XII of Hudson's book on Building and Engineering Contracts. So far as the first part of the argument is concerned, viz ., the applicability or the extent of applicability of the above maxim of English common law in India, the position does not call for any further discussion than is found in the order of this court in Company Application No. 45 of 1961, referred to above, especially in view of the observations of the Supreme Court in Bishan Das v. State of Punjab AIR. 1961 SC. 1570, 1574, wherein their Lordships accepted as correct the statement of law contained in Thakoor Chunder Parmanick v. Ramdhone Buttacharjee [1866] 6 WR. 228 approved subsequently by the Privy Council in Narayan Das v. Jatindranath [1927] ILR. 54 Cal. 669. Among the English cases, Mr. Karanth relied particularly upon two decisions, viz., (1) Beeston v. Marriott [1864] 8 LT. 690 ; 66 ER. 778 and (2) Bellamy v. Davey [1891] 3 Ch. 540. I may at once mention that both these cases dealt with the respective rights of the contractor and the employer over the material lying on the site and not yet incorporated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the work could be completed, the employer which was a company was sought to be wound up upon action taken by its debentureholders. The question was whether the property in the tanks had passed to the company to be seized and appropriated by the receiver in liquidation or the property was to still continue in the contractor. On a construction of the contract, Romer J. held that as between the contractor and the company, the contractor was not bound to complete and deliver over the tanks without having his purchase money paid to him or securing a first charge on the purchase money. In the case of Beeston v. Marriott [1864] 8 LT. 690 ; 66 ER. 778, a railway company employed Beeston to execute certain works and the contract contained an express provision to the effect that rails, steel ware and other material brought by the contractor to the site were to become immediately the absolute property of the employer-railway company, but contained certain further provisions indicating that such materials could be used whether by the railway company or by the employer only for the purpose of executing the works and that surplus material, if any, remaining after the completion of the works was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions from ship-building contracts were cited, but it is obvious that a ship-building contract differs from a building contract in a most vital respect, namely, that the work is not being done upon nor is it affixed to the land of the employer, and the ship-building cases are consequently most concerned with two main questions, viz., at what point of time does the general property in the ship pass to the employer or purchaser, and, secondly, what is included with the ship when the property does pass ? . . . The well-known rule is that the property in all materials and fittings, once incorporated in or affixed to a building, will pass to the freeholder-............... The employer under a building contract may not necessarily be the freeholder, but may be a lessee or licensee, or even have no interest in the land at all, as in the case of a sub-contract. But once the builder has affixed materials, the property in them passes from him, and at least as against him, they become the absolute property of his employer, whatever the latter's tenure of or title to the land. " The position as summarised in Halsbury's Laws of England, third edition, third volume, based upon the same rulings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include cost of material, cost of labour, cost of supervision and a margin of profit. A person who acquires profits by conducting or exercising a trade or profession cannot be described as a person the object of whose exercise of such profession is to acquire the property in respect of which he exercises his profession or trade. I do not see therefore any reason to hold that because the Latin maxims do not apply in India, a building contractor whose bills have not been paid should be held to become the owner of the building. As already stated, it is no part of the case of the applicants that the claim made by them in this application has any reference to loose materials or plant or scaffolding, tools or implements, but to the materials incorporated into the structure constructed by the applicants. Although this makes it not quite necessary to refer to the terms of the contract which, according to the argument, have a bearing upon the question of passing of property in materials, I might briefly indicate the argument. Under clause 50 of the conditions of contract, the entire work covered by the contract is to be maintained at the contractor's risk until the contract is fulfille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protection of the property. It is therefore in the fitness of things that the risk or responsibility for safe custody should lie upon the person who in the circumstances is more capable of having control over it than upon the employer. It is a well established proposition that a building contract is never said to have been properly completed unless the building or the structure is not only completed but all unnecessary materials and rubbish are removed from the site and the building or structure cleared and handed over in proper condition fit for immediate use. Hence, the provisions of clause 50 which are very commonly found in every building contract cannot be taken as indicative of where or in whom the property lies. The materials which may be taken possession of and used by enforcing the right under clause 61 are obviously materials which are yet to be incorporated into the works or building, and as pointed out in the case of Beeston v. Marriott [1864] 8 LR. 690 ; 66 ER 778 even the taking up of that material by the employer could only be for the purpose of using it to complete the work left uncompleted by the contractor. Likewise, when plant and other implements of the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s payments becoming due are concerned, could only be that of a debtor and creditor What is described as Hen claimed by the applicants for unpaid money due to them under the contract is in my opinion, not quite an accurate is a description of the exact right claimed by them. "Lien " in its real sense is a possessory right, a right to detain a specific movable in order to enforce some payment or the performance of some obligation which, by virtue of some previous contract between the owner of the thing and the detainer, the owner becomes bound to pay. It is in fact in earlier stages a right to convert one's position as a work until into the position as a pledgee. Workman, for example, or a tailor has a lien to retain the article on which he has expended his work until his wages or cost of material, if any, are paid. Such also are liens known in India as, for example, banker's lien or lawyer's lien or the Hen of an agent. All these liens are lost once the banker parts with the security in his possession the lawyer parts with papers in his possession or the agent parts with cash or other articles in his possession acquired by him in the way of his agency business. Hence the right cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicated fund would be set apart exclusively for the purpose of paying the bills of the applicants. My attention has been drawn to certain letters also which passed between the applicants and the company before the resolution in question was adopted by the board of directors. On May 15, 1951, the applicants addressed a long letter to the company making several complaints against the company in the matter of this contract and concluded the same as follows : " The fabrication, erection, glazing and painting work can be done and the entire work finished in about three months, a week or two more or less depending on weather conditions. If you will look into our contract estimate, you will find that you will have to pay us about rupees 240,000 in round figures. This sum you must secure and we must have guarantee of payment for materials collected and the work executed during these months. It is up to you to make it possible that the programme is kept up and the work completed. " On January 10, 1952, the managing agents of the company sent a circular letter to the shareholders pointing out that it was proposed to increase the capital of the company by an additional issue of 50,000 ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l are spent away on drawings of the moneys advanced by the managing agents, or on purchases of cotton, or on other revenue items, the object with which the capital was increased, viz., to complete all incomplete building works and bring into operation the weaving department, would be frustrated. Resolved that a sum of Rs. 1,75,000 out of the moneys now received and moneys which will be available in the future be allotted for payment of the bills of Messrs. B. S. Madhava and Co., Steel Structural Contractors, for completion of the buildings and that the balance of moneys may be utilised to the best advantage of the mills, with due regard for completion of the other items of capital works, all necessary works including the erection of looms and ancillary machinery, driving equipments, purchases of stores, etc., to be completed not later than three months . . . (7) Read the managing agent's note that Sri M. S. Nanjundaswamy, the underwriter, had secured subscription for the full number of 29,552 shares, which he had underwritten, and perused the list of applicants for these shares. Recorded with thanks to Mr. M. S. Nanjundaswamy and Mr. M. N. Basavarajaiah. Resolved that 29, 552 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a partner would get through the work successfully. From the point of view of the applicants, his presence on the board would have inspired confidence in them that they need not entertain any apprehensions or stand in need of shedding them at a later stage. It is, however, stated that the resolution should be understood in the light of the previous correspondence between the parties. The correspondence, so far as I have been able to assess its value, merely amounts to this, viz., that whereas the applicants who had not been paid large amounts due to them were anxious to get payments and were willing to exert pres sure by threatening to abandon the contract, the company was anxious somehow to induce the applicants to continue the contract to completion. The conduct of the applicants in that regard does not appear to me to be very different from that of a person to whom large sums are due from a recalcitrant debtor, and the attitude of the company in making promises is also not very different from a debtor of that type. No person with business experience would have placed any great reliance upon promises of a debtor of that type. If, as the applicants indicated in their letter of Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted themselves to entertain by reason of the resolution was either mistaken or misplaced. In the circumstances, I find it difficult to accept the legal proposition that the resolution either by itself or upon such other facts as have been placed before me and summarised above could be said to amount to a creation of a trust in respect of Rs. 1,75,000 in favour of the applicants. That this conclusion is not only not unfounded but actually supported by the conduct of the applicants themselves is obvious from the following circumstances. In the course of the arbitration proceedings the records of which' disclose how the parties were at variance in respect of almost every detail of their disputes, the applicants did not raise any question of trust. While they very strongly protested that the conduct of the company towards them was anything but fair, they did not formulate the case of trust in the shape it is now presented to me. It may be, as stated by Mr. Karanth, that at that stage it was unnecessary for them to have raised that point, because the proceedings to wind up the company were instituted sometime after the arbitration started. But it also suggests that the theory of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Council decision expressly states that neither in the trial court nor before the appellate court was any question raised that the money which was the subject of that case was not trust money. In fact, throughout, the case proceeded on the basis that the money did constitute trust money and capable of being traced. The case in Official Assignee of Madras v. Devakottah Nagarathar Sri Minakshi Vidyasalai Paripalana Sangam [1929] ILR. 52 Mad. 919 also was a case in which it was conceded at the hearing before the insolvency judge that the money in question was undoubtedly trust money. Once it is conceded that a fund in question was a trust fund, it is unnecessary for us to go any where beyond sections 63 and 66 of the Indian Trusts Act to support the case of the beneficiary either to claim that the trust attaches itself to the property into which the money has got converted or to claim a charge over the entire fund of the defendant if the trust money has been wrongfully mixed up with the defendant's funds. Before proceeding to deal with the case of earnest money deposit of Rs. 5,000, it will be convenient to dispose of the applicants' claim in regard to the Mysore Bank's mortgage to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the contractor with the employers. Paragraph 68 provides that the contractor is not to be entitled to interest upon the earnest money or the security deposit or the withheld amount. Clause (b) of that paragraph reads as follows : "Whenever the withheld amount reaches Rs. 5,000 or a multiple thereof the contractor may, at his option, deposit with the employers an equal amount in sums of Rs, 5,000 or a multiple thereof, in any of the forms ' of interest bearing securities recognised for the purpose by the employers and subject to the provisions contained therein in which case the equivalent withheld amount held under ' deposits ' shall be paid to him forthwith." So far as the earnest money is concerned, there can he no doubt that it was initially and continued to be the property of the applicants. Its very purpose of serving as security to the employer to enforce due fulfilment of the contract by the contractor and to recoup loss, if any, con sequent upon the contractor's default proceeds upon the footing that the money belongs to the applicants and should continue to belong to them until in exercise of the right of recovery or forfeiture which the employer has under the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph 64 dealing with unsanctioned extras or paragraph 65 which leaves intact the liability of the contractor under the general law for fraud, wilful neglect or default, etc. Paragraph 66 provides that no payment or advance will ordinarily be paid for unfixed materials when the rates are for finished work in site. That also is not relevant to the present topic. The provisions of paragraph 67 have an important bearing on the question. The material portion thereof reads as follows : " Payments will be made to the contractor under certificates to be issued once a month by the Modern Architects. Within fourteen days off the date of each certificate, payment will be made by the employers of a sum, equal to 90 per cent, of the value of the work, certified. Under the certificate to be issued by the Modern Architects, a further payment of 5 per cent, of the total amount so certified will be made when the works are completed, provided there is no recovery from or forfeiture by the contractor to be made under clause No. 60. Payment will be made of the balance within a further period of six months, or as soon after the expiration of such period of six months as all defects shall have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows therefore that the retention amount serves the same purpose as the one intended to be served by the earnest money or security deposit. If it is a fund to be utilised by the employer for his benefit and at the expense of the contractor, the clear assumption is that the property or ownership therein belongs to the contractor, and the interest which the employer has therein is in the nature of a security. That interest in the nature of security can be enforced by the employer in certain circumstances. If no occasion arises for the employer to enforce his right of security and the period stipulated for the purpose in the contract has expired, the with held amounts in the same way as earnest money or security deposit become refundable to the contractor. Having regard to the nature and purpose of this deposit, the question whether the whole of it becomes refundable or only apart thereof, depends upon whether occasion for exercising the employer's right of security in respect of it has not or has arisen. The contract concerned in this case did not have a normal course or normal termination. Therefore, on the terms of the contract alone, it is not possible to ascertain the date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion really avail able to the company and now to its liquidator. If, in the absence of any abnormal circumstances, certain number of bills had not been paid by an employer before the building contract has been completed, it would certainly not have been open to the contractor to insist on payment of the stipulated percentage of his bills which it was open to the employer to withhold. He could have asked for payment of the withheld amounts only after the period provided for its being withheld by the relevant terms of the contract. This clearly indicates that rights and liabilities of the parties in respect of the withheld amounts are distinct and different from those in respect of the rest of the amount. Even when in a normal case the employer makes payment of all bills submitted by the contractor and withholds a certain percentage thereof, the actual legal effect is the same as if the contractor having received the entire amount of the bill has simultaneously deposited with the employer a percentage thereof by way of security. Hence, in any view of the matter, the character of the withheld amounts cannot undergo any change depending upon whether the amount payable under the bill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be traced to some provision of the contract itself or custom binding on the parties and implied as a term in the contract between them or of law. There is no provision in the contract for payment of interest. There is no proof of any custom providing for payment of interest. The only remaining basis for the applicants' claim must therefore be found in the provisions of some statute. Reliance has been placed on section 23 of the Trusts Act, according to which a trustee is not normally obliged to pay interest except when he is guilty of breach of trust and except in the circumstances specifically set out in that section. One of those circumstances set out under which a trustee is bound to pay interest is what is stated in clause (b) of that section which reads as follows : " (b) Where the breach consists in unreasonable delay in paying trust money to the beneficiary." That also seems to be the basis on which the arbitrator directed payment of interest on the earnest money of Rs. 5,000 at the rate of six per cent. His winding, as I have already stated, must be taken to indicate that the earnest money became refundable on a date not later than May 9, 1955, and that the withho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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