TMI Blog1972 (9) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... the stockists for distribution of paper in the city of Madras for a total quantity of 250 tons per annum. The mills appeared to have accepted this proposal on February 13, 1961, subject to certain important terms and conditions which have been embodied in writing. The important conditions, viz ., conditions 4, 4-A, 5 and 6, are extracted hereunder s "4. Stockists shall pay us a sum of Rs. 35,000 as minimum deposit or such deposit commensurate with the quantity of paper to be supplied at the rate of Rs. 350 per ton. 4-A. Of this amount, 50% shall be paid immediately at the time of appointment, and the balance at such time as we may call for it. 5. The amount of deposit will carry interest at the rate of 4 % per annum. We agree to refund the deposit amount of the stockists in the event of the stockistship being cancelled, and upon settlement of all accounts. 6. We will endeavour to allot to the stockists a quota of 250 tons of paper and paper products per annum. The quality and description of each class or classes of paper and paper products within the said quota shall be in accordance with the manufacturing programme of the manu-facturers, Messrs. Mandya National Paper Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the allotment of quota of paper to the company was expected from 1st January, 1962, and that up to that time the applicant was to be paid a sum of Rs. 200 by way of interest at 6 per cent. for Rs. 40,000 and thereafter, when the supply of paper by the mills to the company commenced, a lump sum payment at the rate of Rs. 1,000 per month. The agreement also shows that the sum of Rs. 40,000 was not to be used by the company for any other purpose, that the entirety of the sum must be paid to the mills through South India Corporation Agencies Private Ltd. and the company would also get an assurance from the mills that the return of the sum of Rs. 40,000 to the applicant shall be assured by South India Corporation Agencies Private Ltd., when the agency ceased. On February 13, 1961, the company was appointed as stockists for the city of Madras by South India Corporation Agencies Private Ltd. and a sum of Rs. 30,000 alone was paid by the company to the mills as security deposit. The entire sum of Rs. 40,000 paid by the applicant was not paid to the mills. In Company Petition No. 21 of 1961, Manasuba and Co. was wound up on August 11,1961. Some time thereafter, the liquidator obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, burdened with certain fiduciary obligations, is treated as property held in trust, for the purposes of insolvency laws and property held for a specific purpose. Such property or money held for a specific purpose is by law treated as clothed with a species of trust governed by the same principles and rules which apply to property held in express trust. Section 529 of the Companies Act of 1956, which has taken the place of section 229 of the old Act of 1913, corresponds to section 317 of the English Act. In the matter of preferential payments and claims for priority resting upon a fiduciary relationship, the Companies Act merely provides that the provisions of the bankruptcy law would be observed. Section 52(1)( a ) of the Presidency Towns Insolvency Act (corresponding to section 38(1)( a ) of the English Bankruptcy Act of 1914) provides as follows. " Section 52 : (1) The property of the insolvent divisible amongst his creditors, and in this Act referred to as the property of the insolvent, shall not comprise the following particulars, namely : ( a )property held by the insolvent on trust for any other person".... (Other portion omitted as not relevant). In Williams on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same in certain contingencies ; ( iv ) whether the person who had deposited the fund has an unconditional right to withdraw the amount at his option, etc ., etc . There was a divergence of opinion between the decisions of the High Courts of Bombay, Allahabad and Lahore on the one side and the High Courts of Madras and Calcutta on the other. They are all cases of moneys deposited in pursuance of sole selling agencies or by employees as security deposits or contributions of provident fund 01 moneys deposited by distributors of films with the producer for the exhibition of pictures. It may not be necessary to examine in great detail these decisions in view of the recent decision of the Supreme Court in Seth Jessa Ram Fatehchand v. Om Narain A.I.R. 1967 S.C. 1162 , and the latest decision, in England, of the House of Lords in Barclays Hank v. Quistclose Investments Ltd. [1968] 3 W.L.R. 1097 ; [1968] 3 All E.R. 651 ; [1969] 39 Comp. Cas. 105 (H.L.), affirming the decision of the Court of Appeal in Quistclose Investments Ltd. v. Rolls Razor Ltd. (In Liquidation ) [1968] 2 W. L.R. 478; [1968] 1 All E.R. 613 ; [1968] 38 Comp. Cas. 810 (C.A.). Both the aforesaid decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention. Mr. M. S. Venkatarama Iyer, learned counsel for the applicant, contended that the terms of the agreement and the surrounding circumstances and the conduct of the parties clearly show that the entrustment of the money of Rs. 40,000 by the applicant with the company was for a specific purpose, specifically earmarked as to be deposited with the mills, on the distinct understanding that the sum of Rs. 40,000 furnished by the applicant should be simply passed on to the mills and that the company should have no kind of dominion or control over that fund, had no authority to use the fund for any other purpose and that there was also an express obligation on the part of the company to return the security deposit when returned or refunded by the mills. The prohibition against the company exercising any dominion or authority over the fund continued throughout and the trust character of the entrustment is emphasized in the stipulation that when the mills returned or refunded the money, the company should simply pass it on to the applicant, the company having no power whatever to deal with the fund in any other manner. Learned counsel, Mr. Venkatarama Iyer, also urged that, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ockists, in particular to the provisions in which the particular clause specifies that, while the mills will make every effort to supply to stockists their annual quota, the mills would not incur any legal liability if the supply is deficient and that, when such a unilateral power is reserved with the mills, it is meaningless to expect the stockist to deposit the entire sum of Rs. 87,500. In substance, the contention is that the sum of Rs. 30,000 deposited is sufficient compliance with the agreement and the agreement has taken effect between the company and the mills and there is no question of the failure of the purpose of the agreement. We are not impressed with this argument. The reply which South India Corporation Agencies Private Ltd. (representing the mills) wrote to the company on 6th July, 1961, clearly proceeds on the footing that the company is bound to deposit the entire sum of Rs. 87,500 for 250 tons of paper and paper products at the rate of Rs. 350 per ton and that the mills have treated the company as in default inasmuch as only a sum of Rs. 30,000 had been deposited. In the report submitted by the official liquidator, the stand has been taken that the contract is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the agreement, the applicant had to deposit a sum of Rs. 50,000 as security for the due performance of the contract and the said sum was to be retained by the mills carrying interest at 6 per cent. per annum to be paid by the mills, and the selling agent was also entitled to certain commission. The agreement further provided that, on the termination of the agreement, the mills shall refund the sum of Rs. 50,000 with interest and if the same is not refunded, the firm (the sole selling agent) shall be entitled to the commission at the rate specified in the agreement as if the agreement had been terminated. Within a period of one year of this agreement the mills went into liquidation and the other party (the sole selling agent) put forward a claim of priority for the return of the fund as a preferential claim. The Supreme Court, after referring to the divergent views of the Bombay, Allahabad and Lahore High Courts on the one side, and the Madras and Calcutta High Courts on the other, observed that this divergence of opinion was more apparent than real, that the decision in each of the cases actually turned upon the particular facts of the case and the terms of the agreement inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and whether the trustee could mix the deposit money with his own money would not be of importance and would not take away the character of the deposit being impressed with a trust. The mere fact that money was deposited as a security is not sufficient to come to the conclusion that it must be treated as trust money. The court will have to look to all the terms of the agreement if in writing and to the facts and circumstances of the case and to the conduct of the parties before coming to the conclusion whether a security deposit was impressed with a trust. If a trust can clearly be spelled out from the terms of the agreement that ends the matter. But, if the trust cannot be spelled out clearly, the fact that there was no segregation provided for and the fact that interest was to be paid would go a long way to show that the deposit was not impressed with the character of a trust particularly where the person with whom the deposit was made could mix it with his own money and could use it for himself. In such a case the inference would be that the relationship between the parties was that of a debtor and creditor. Further, besides these circumstances, if there is any other term which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng agreement and claim back Rs. 40,000 does not detract from the trust; on the other hand, it emphasizes the trust obligation. Clause 4 puts the matter beyond any doubt that the agreement clearly implies a trust. Under that clause, the company undertakes that an assurance will be obtained from the mills for the return of Rs. 40,000 to the applicant when the agency ceases. Clauses 3 and 4 will have to be read together. The very fact that such an assurance from the mills is specifically stipulated shows that even at the stage when the money is returned by the mills it should not be returned to the company but it should be only paid into the hands of the applicant. It is true that the company did not get such assurance from the mills, but that does not affect the question, because what is necessary is to determine. whether or not a trust was created at the time when the financing agreement was entered into between the company and the applicant. If a trust is created by reason of the provision in clause 4, the fact that the trustee did not fulfill the obligation of getting the assurance from the mills or committed default would not make the arrangement any the less a trust. Reading the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or adjust or use any portion of it for any other purpose. It is the coalescence of these stipulations, both negative and positive, involving such duty on the part of the company, which gave rise to the secondary trust. It is this principle which emerges from the decision of the House of Lords in Barclays Bank Ltd.'s case ( supra ). We are, therefore, clearly of the view that the agreement in this case clearly created a trust and that the trust throughout continued to subsist and, in any event, when the agency ceased, the secondary trust came into existence in favour of the applicant. We shall now examine the leading decisions in England, in which, on similar facts and circumstances, the property was held to be entrusted with the bankrupt or the insolvent company for a specific purpose so as not to constitute the general assets of the bankrupt or the insolvent company so as to be distributed amongst the general body of creditors. There are three leading English decisions : Toovey v. Milne [1819] 2 B AId. 683; 116 E.R. 514, Edwards v. Glyn [1859] 2 E E. 29; 121 E.R. 12 and In re Rogers [1891] 8 Morrel's Bankruptcy Reports 243 , which enunciate the law as to when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arantees on the distinct understanding that it should not be used unless the bankers could clearly see to it that the crisis or the run was got over. The defendants carried on the business as bankers in London and, in that capacity, acted as the London agents of Oak and Snow. They advanced to Oak and Snow on the security of the guarantee 3,000 in gold and notes which were placed in a box and handed to Snow. The scheme to tide over the crisis did not materialise as there was great run and so, Oak and Snow returned the box containing the 3,000 to the defendants, and the firm suspended the payment and became bankrupt. The court decided two questions : (1) the return of the 3,000 to the defendants was not a fraudulent preference, and (2) the money was obtained by the firm of bankers (Oak and Snow) for a specific purpose and that purpose having failed, the sureties (the defendants) had equitable right to the return of the money. Earle J. observed as follows at page 48 : "But, I also think that this was a specific advance for a specific purpose, on the understanding between the bankrupts and their sureties through whom it was procured for them, that the money, if not used for that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of purchasing a certain business and on the distinct undertaking of the defendant so to apply the money. The defendant did not apply it for that purpose, but spent some of it in paying debts of his own and then became a bankrupt. The plaintiff filed an action to trace the remainder of the moneys advanced by him and it was held by North J. that a clear duty had been imposed upon the defendant of applying the money in a particular way and a fiduciary relationship created, so that the money not having been applied in the specified way, the plaintiff could recover so much as remained or in full notwithstanding the bankruptcy. North J. observed : "Those being the facts, I have no doubt as to the principle of law to be applied to them. It is very well-known law that, if a person makes a payment to another for a certain purpose, and that person takes the money, knowing that it is for that purpose, he must apply it to the purpose for .which it was given. He may decline to take it if he likes, but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose. Again, if a man gives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets of the bankrupt. Lindley L.J. observed at page 248 as follows: "The trustee is endeavouring to affirm the transaction in part and to repudiate it in part. He wants to claim the money as the bankrupt's because it came to his hands and at the same time to reject the terms and conditions on which alone the bankrupt procured it. This is manifestly unjust and contrary to principle. If authority be wanted in support of this view, it will be found in Toovey v. Milne [1891] 2 B. Ald. 683; 116 E.R. 514 and Edwards v. Glyn [1859] 2 F E 29 and other cases of the same class. I entertain no doubt that Mosley ( i.e ., the lender) could have obtained an injunction to restrain the bankrupt from using that money for any purpose except that of paying his pressing creditors. If this be so, the money never was the bankrupt's in any proper sense so as to vest in his trustee as part of his general assets". Bowen L.J. put the matter thus : "I am of the same opinion. I think the true inference is that the money came to the bankrupt's hands impressed with a trust, and until it was paid over it remained impressed with that trust. It did not become the property of the bankrupt divisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do whatever he liked with it, or, in other words, the money was free and he had no right to apply it to any purpose other than paying to the petitioning-creditor, and therefore, the sum was impressed with a quasi-trust. Wright J. observed thus at page 57 : "Now it is not a very easy matter, either in point of law or in point of fact, to decide ; but if the 300 ever became the debtor's money, it is plain that he had the right to spend it, or to speculate with it, or do whatever he pleased with it. But what I find is, that it never came into the debtor's hands at all; and I am of opinion that it never was intended to come into his hands. It is quite clear that Messrs. Beyfus Beyfus would never have consented to that money going out of their hands into the debtor's hands, or being applied for any purpose whatever other than the dismissal of the petition by the bank. Beyfus Beyfus themselves could not have applied it to any other purpose after the arrangement which they had made with Mr. Salaman on the one hand and the debtor on the other; nor, as I have said, could the debtor have applied it to any other purpose. The charge is contemporaneous with the arrangement that is made w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Farwell L.J., dissenting on the ground that the money was paid for a specific purpose and cannot form part of the general asserts of the bankrupt. Cozens Hardy M. R. observed that the money was advanced solely for the purpose of releasing the goods and applied the test that if Watson had attempted to intercept the money and apply it to his own purposes, it would have been a breach of faith, and the theatre manager might have restrained him by injunction. Hamilton L.J. observed : "Whatever else the parties by the transaction meant, they did not mean that the money found by the third party should be money divisible among the bankrupt's creditors, nor did anybody think that the money was going to the bankrupt. It was provided for one purpose only, and care was taken that it should be applied to that purpose and no other, and I can attach no meaning to the principle in In re Rogers [1891] 8 Morrell's Bankruptcy Reports 243 (C.A.) and In re Drucker (No.1) [1902] 2 K.B. 55 (K.B.) at 237 (C.A.) that would not cover this case and I can see nothing in the facts of this case to distinguish it". We are clearly of the view that the test laid down in the above case is clearly sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. The Court of Appeal [1968] 2 W.L.R. 478; [1968] 1 All E.R. 613 ; [1968] 38 Comp. Cas. 810, 816, 820, 821 (C.A.) (reversing the decision of Plowman J.) held that the money was lent for a specific purpose and that as the primary purpose of the entrustment could not be fulfilled, the entrustment throughout continued to be in the nature of a trust and that there was nothing in law against a transaction to combine in itself the notions of a loan or a contract and a trust and that both the features may co-exist in any single transaction, in the sense that the existence of the notion of contract does not rule out the existence of a trust also being involved in the arrangement. Harman L.J. explained the legal position in these terms, at page 618: "That a loan of money on a specific condition does create a trust attaching to the money in the hands of the borrower, and that that trust subsists in favour of the lender if the condition fails, seems to me to be settled by authority binding on this court, contained in a series of bankruptcy cases. This is a branch of the law of trusts created by the common lawyers, but it is, after all, none the worse for that. The first case is that of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t defendant-company other than the payment of the dividend. How, then, can it be said that, upon that one purpose ceasing to be feasible, the first defendant-company shed its character of trustee in relation to the money, and became, vis-a-vis the plaintiff-company, at liberty to treat the money as beneficial property of the first defendant-company? The arrangement remained that the first defendant-company was not entitled to do this. But I think however, that there is authority to show the continuing trusteeship of the borrower, the sole permissible use by the borrower of the money having ceased to be feasible, that trusteeship necessarily being for the lender". Russell L.J. also referred to with approval the catena of the early English decisions referred to already. While referring to Toovey v. Milne [1819] 2 B. Ald. 683 ; 116 E.R. 514 ; the learned Lord Justice observed [1968] 2 W.L.R. 478 ; [1968] 1 All E.R. 613 ; 38 Comp. Cas. 810, 821, 828 (C.A.) : "Rather do I think that Abbott C.J. was using this formula to indicate that the arrangement forbade the use by the bankrupt of the money lent for any purpose other than that of settling with creditors, and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Court of Appeal) stressed the alternative ground of the secondary trust arising when the purpose could not be fulfilled. The following is the relevant head-note in the decision of the House of Lords which fully brings out the principle underlying this decision : "The respondents were entitled to recover the money from the appellants, since ( i ) as between the respondents and R. R. Ltd., the terms on which the loan was made were such as to impress on the money a trust in the respondents' favour in the event of the dividend not being paid, because ( a )it followed from the clear terms of the loan, that the money was not to become part of the assets of R. R. Ltd., but was to be used only for the payment of a dividend, and that if, for any reason, the dividends were not paid, the money was to be repaid to the respondents ; and furthermore, ( b )the transaction of loan, giving rise to a legal action of debt, did not of itself exclude the implication of a trust enforceable in equity, for legal and equitable rights and remedies can co-exist in one transaction; and there was no reason why the law should not give effect to the clear intention to create a seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judges who, from 1819 onwards, have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction, of legal and equitable rights and remedies : when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purposes (see In re Rogers [1691] 8 Morrell's Bankruptcy Reports 243 (C.A.) , where both Lindley L. J. and Kay L. J., explicitly recognised this); when the purpose has been carried out ( i. e ., the debt paid) the lender has his remedy against the borrower in debt : if the primary purpose cannot be carried out, the question arises if a secondary purpose ( i.e ., repayment to the lender) has been agreed, expressly or by implication; if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets), then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his way of putting it is that quasi-anything gives uncertain guidance in the law. I would prefer to say that money is paid for a special (or specific) purpose so as to exclude mutuality of dealing within section 31 if the money is paid in such circumstances that it would be a misappropriation to use it for any other purpose than that for which it is paid". Mr. Venkatarama Iyer urged that in order to determine whether the property has been made over for a specific purpose impressed with a trust, one test as pointed out by the House of Lords is to determine whether the company would not be guilty of misappropriation if it used the money for any purpose other than the one for which it was paid, and if the answer is yes, it necessarily follows that a trust has been created. Applying this test, we have not the slightest hesitation in holding that a trust has been created in the arrangement and the fact that this arrangement embraces contractual obligations does not detract from the substance of the arrangements being essentially in the nature of a trust. We may also refer to the following statement of the law in 38 Halsbury's Laws of England, at page 865 (paragraph 1459) in which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution agreement in Karnataka Films v. Official Liquidator, Chitrakala Movietone Ltd. [1951] 21 Comp. Cas. 138; AI.R. 1952 Mad. 481 In that case, a sum was deposited in a film producing company (which went into liquidation) by the distributor and it was agreed that the sum shall be refunded at the end of the period of the deposit or on a prior determination of the agency. The company court observed that when the sum was deposited for a specific purpose, it became trust money. In the Bench decision in Indian Hume Pipe Co. Ltd. v. Travancore National and Quilon Bank Ltd [1942] 12 Comp. Cas. 124; I.L.R. [1943] Mad. 187; A.I.R. 1942 Mad. 646 . a company had two places of business, one at N and the other at B and the bank, which subsequently became insolvent, had branches in both the places, N and B. The customer-company had an account in the bank's branch at N but no account at the branch at B. The company instructed the branch at B, to collect the amount of a cheque drawn in its favour and remit the proceeds to the branch at N, to the credit of the company's account. The branch at B collected the amount of the cheque, but did not carry out the further instruction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security deposit has to be regarded as trust money under the circumstances of the case. On behalf of the liquidator, it was argued that, under the terms of the agency agreement, the company would be entitled to adjust and set off any claim which the company may have against the sole selling agent and that the right to set-off detracted from the transaction being a trust. But this argument was not accepted. It was observed at page 322 as follows : "That creates the trust and makes the bank a trustee for the money so sent, in spite of the fact that the ordinary and normal relation between a customer and a banker is that of creditor and debtor. That principle, in our judgment, applies with greater force to security deposits in cash made by an employee or by a selling agent of a company. The money would be regarded as trust money in the hands of the employer or the company, unless there are other terms and conditions which would make the relation between them to be that of creditor and debtor. As we have already pointed out, the mere fact that there is a stipulation for payment of interest on the deposit money or the fact that in certain contingencies the employer or the company, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion goes further than the other decisions in holding that under the law of insolvency the money entrusted cannot be said to be the property or assets of the insolvent, i.e. , assets of the insolvent company, when only the question of distribution would arise. It is true that this Bench decision goes much further than the other decisions. For all these reasons, we hold that the decision of the learned company judge is correct ; the appeal fails and is dismissed with costs. This appeal having been set down "for being mentioned" on September 7, 1972, the court delivered the following judgment on September 7, 1972. It is stated on behalf of the appellant that the sum of Rs. 30,000 has been invested in a fixed deposit with some bank. As we have held that this money belongs to the respondent, N. Chandranarayanan, the official liquidator will either assign or transfer the fixed deposit receipt in favour of the respondent or pay him the proceeds of the same. The respondent will be entitled to the sum of Rs. 30,000 with interest at 6 per cent. from the date of the application and after adjusting the proceeds of the deposit of Rs. 30,000 with accrued interest, the official liquidator ..... X X X X Extracts X X X X X X X X Extracts X X X X
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