TMI Blog1972 (9) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... embodied in writing. The important conditions, viz., conditions 4, 4-A, 5 and 6, are extracted hereunder; 4. Stockists shall pay us a sum of ₹ 35,000 as minimum deposit or such deposit commensurate with the quantity of paper to be supplied at the rate of ₹ 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 1/4% 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 manufacturers, Messrs. Mandya National Paper Mills Ltd. 3. It is common ground that with a view to ensure the quota of supply of 250 tons, the company would have to deposit with the mills a sum of ₹ 87,500 and, in order to find a substantial portion of the money to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest at 6 per cent. for ₹ 40,000 and thereafter, when the supply of paper by the mills to the company commenced, a lump sum payment at the rate of ₹ 1,000 per month. The agreement also shows that the sum of ₹ 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 ₹ 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 ₹ 30,000 alone was paid by the company to the mills as security deposit. The entire sum of ₹ 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 a return of the sum of ₹ 30,000 deposited with the mills by the company. The applicant filed Company Application No. 351 of 1962 for a dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bankruptcy, latest 18th edition, the learned author has broadly classified, at page 289, under the following three heads, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 deposits d in pursuance of sole selling agencies or by employees as security deposits or contributions of provident fund or 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, and the latest decision, in England, of the House of Lords in Barclays Bank 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 decisions have examined the relevant case law and enunciated certain basic rules and principles which are to be applied in determining the question whether the property should be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow that the entrustment of the money of ₹ 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 ₹ 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 facts of the particular case, the law of trusts came into operation in a two-fold character with regard to the fund : (i) the very entrustment itself clearly created a trust for a spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ota, 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 ₹ 87,500. In substance, the contention is that the sum of ₹ 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 ₹ 87,500 for 250 tons of paper and paper products at the rate of ₹ 350 per ton and that the mills have treated the company as in default inasmuch as only a sum of ₹ 30,000 had been deposited. In the report submitted by the official liquidator, the stand has been taken that the contract is that the company should deposit ₹ 87,500 representing deposit at the rate of ₹ 350 per ton for 250 tons. Even before the learned judge, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 involved therein. After having observed thus, the Supreme Court enunciated certain principles in paragraphs 13 and 14 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 suggests one kind of relationship rather than the other, that will also have to be tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ₹ 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 fulfil the obligation of getting the assurance from the mills or committed default would not make the arrangement any the less a trust. Reading the agreement as a whole, we have no doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. v. Quistclose Investments Ltd., [1968] 3 W.L.R 1097; [1968] 3 All E.R. 651; [1969] 39 Comp. Cas. 105 (H.L.) 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. 10. 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 Ald. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derstanding 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 purpose, should be returned. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an undertaking or makes a representation, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and Edwards v. Glyn 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. 15. 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 divisible amongst his creditors. 16. Kay L.J. stated as follows : The true result of the evidence seems to me to be that the advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioning-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. Bat 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 with Mr. Salaman, and, although the charge, on the face of it, treats this as a loan by Messrs. Beyfus Beyfus to the debtor, that can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and In re Drucker (No. 7)l that would not cover this case and I can see nothing in the facts of this case to distinguish it 20. We are clearly of the view that the test laid down in the above case is clearly satisfied in the instant case. If the Manasuba Company, after having received the money from the applicant, sought to apply it to any other purpose in breach of faith, the applicant would have restrained the company from doing so, and Clauses 3 and 4 in the agreement in the instant case are the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself 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 Toovey v. Milne which I will read : .. . . (omitted as already extracted above). 21. Harman L.J. went on to observe that it did not make any difference whether the money had been repaid to the lender or still was with the bankrupt or with the insolvent company, in the view that when the purpose of paying the creditors failed, the trust was held not to fail, but to continue in favour of the lender and that the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrower of the money having ceased to be feasible, that trusteeship necessarily being for the lender. 22. Russell L.J. also referred to with approval the catena of the early English decisions referred to already. While referring to Toovey v. Milne; the learned Lord Justice observed: 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, that the money was not beneficially the property of the bankrupt to be caught by the relation back of the assignee's title. 23. Sachs L. J. agreed with this view in his concurring judgment tracing the entire case law from the earliest decision of Toovey v. Milne. At page 628, the learned Lord Justice observed as follows; If, however, there was not the slightest chance of the money being thus applied, then, either because there was throughout a further trust in favour of the plaintiff-company as stated by Harman L.J., or because (as was pressed by counsel for the plaintiff-company) upon the well-recognised principle that what a settlor does not give is retained by him on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 secondary trust for the benefit of the respondents, which would arise if the primary trust (to pay the dividend) could not be carried out. 26. Lord Wilberforce, Barclays Bank Ltd. v. Quistclose Investments Ltd. [1968] 3 W.L.R. 1097; [1969] delivered the judgment of the House of Lords while the other learned Lords merely concurred. The first test on which emphasis was laid was that the defendant-bank could use it only for the purpose of paying the dividend and not for any other purpose. In our case, as already observed, the entire scheme of arrangement and in particular Clauses 3 and 4 indicate that the company cannot use the money for any other purpose. Some effort was made by counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, and other variations if desired : it would be to the discredit of both systems if they could not. In the present case, the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust to pay the dividend could not be carried out, is clear and I can find no reason why the law should not give effect to it. 27. We are clearly of the view that this decision completely supports both the limbs of the argument of Mr. M.S. Venkatarama Iyer. He also relied upon some observations in the latest decision of the House of Lords in National Westminster Bank Ltd. v. Halesowen Presswork Assemblies Ltd., in which the question of the bank's right to set off the customer's account came up for consideration in the context of a claim to set off under Section 31 of the Bankruptcy Act, At page 466, Lord Simon of Glaisdale laid down the test as to what constitutes mutual dealings and mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 is stated that where property is transferred into the possession of a person ostensibly for his own use, but really to effect or assist a purpose which is never carried out, there is a resulting trust of it for the person who transferred the property and he can make good his claim to it. We may also refer to the statement of the law in Mulla's Insolvency, second edition, at pages 460 and 461, where the learned author has observed that money lent to a person for a specific purpose like paying pressing creditors is impressed with a trust for that purpose and that it is not the debtor's property and the official assignee cannot claim the same in insolvency. Williams on Bankruptcy, 18th edition, discusses this matter at pages 304 and 305 under the caption, property or money deposited for specific purpose , and at page 306, the learned author has referred to the decision of the Court of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted 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 customer-company, and retained the money at the branch at B till the bank went into liquidation. It was held that the money in the hands of the bank's branch at B was entrusted for a specific purpose of making collection and remitting to the branch at N and till that purpose was achieved the money in the hands of the branch at B was clothed with a fiduciary character. Toovey v. Milne and Edwards v. Glyn, the early English cases, were all referred to as supporting the conclusion arrived at by the court. The Bench also referred to and followed the leading decision of the Court of Appeal in In re Farrow's Bank, [1923] 1 Ch. 41 (C.A.) in which also it was held that till the moneys are collected by the collecting bank and credited to the customer creating the relationship of debtor and creditor, the value of the cheque in the hands of the collecting bank were moneys held for a specific purpose on behalf of the custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a stipulation for payment of interest on the deposit money or the fact that in certain contingencies the employer or the company, as the case may be, would be entitled to liquidate his or its claim from out of it against the employee or the selling agent would not establish the relationship of creditor and debtor. The money deposited as a security would still be regarded as trust money in the hands of the employer or the company. We, accordingly, agree with the view taken in In re Hindustan Commercial Bank Ltd., [1938] 8 Comp. Cas. 101 ; A.I.R. 1938 Mad. 651 and In re Travancore National Quilon Bank Ltd., [1939] 9 Comp. Cas. 60; A.I.R. 1939 Mad. 337 On the terms of the contract which was made in this case between Kshetra Mohan Dass and the East Bengal Sugar Mills Ltd. the former is entitled to have the sum of ₹ 10,500 together with interest in terms of his contract out of the assets of the company in the hands of the liquidator in priority of all other claims against the company. 30. This reasoning does not run counter to the decision of the Supreme Court, because the Supreme Court itself has observed that if the contract clearly implies a trust, the fact that the recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 30,000 with accrued interest, the official liquidator will pay the balance to the respondent. 34. This case having bean set down for being mentioned again on this day on the letter of the advocate for the appellant dated September 20, 1972, the court delivered the following judgment: The order of the court was pronounced by: Ramamurti J. 35. The order pissed by us on the 7th September, 1972, by way of implementation of our main judgment dated 4th September, 1972, does not appear to be correct. It is now found, as stated by the official liquidator, that the sum of ₹ 30,000 has not been invested in separate fixed deposit in any bank. What the official liquidator has done is to invest it along with the general funds, as he is bound to do under the statute. The official liquidator states that this does not earn 6% separate interest and the interest which is apportionable to this sum of ₹ 30,000 is ₹ 9,000. We, therefore, direct the official liquidator to pay a sum of ₹ 39,000 to the applicant-respondent. The official liquidator will pay the sum of ₹ 39,000 to the respondent within two weeks after he obtains the copy of the decree. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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