TMI Blog1956 (1) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... rights of the secured creditors and the claim, if any, of some of the creditors to be paid in priority. What the general body of creditors can claim to be distributed among them are the assets of the company. The answer to the question in the present case, therefore, depends on whether the amount claimed by the respondents came to belong to the company and is held by it as a part of its assets. 4. What then are the assets of a company? It does not require a statutory provision to establish that no property in which the company has not a beneficial interest can be one of its assets, even though it be a property held in its hands. Unlike the Insolvency Acts, the Companies Act has not undertaken to say what properties shall not be regarded as the properties of a company in liquidation and seems to have left the matter to principle. Section 62(1)(a), Presidency Towns Insolvency Act says specifically that the property of the insolvent divisible among his creditors shall not comprise property held by the insolvent on trust for any other person. Similarly, Section 28(5), Provincial Insolvency Act provides that the property of the insolvent, vesting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower, in spite of the stipulation for repayment. Repayment is not refund. In the case of the Companies Act, it is not even necessary to invoke that principle, because the Act deals directly and specifically with debts and lays down what the rights of the creditors shall be in a liquidation of the company. Leaving aside the secured creditors who may look to their securities wholly or so far as they may be sufficient to satisfy their debts, the ordinary creditors have no absolute right to get back the whole of what they lent on the footing that the money remained their property. Monies obtained by a company as loans are treated by the Act as having become its own property and as still such property so far as they may be available; and the ordinary creditors can only share in the existing assets of their debtor in proportion to their debts, subject to the rights of the secured, creditors and those of themselves who may be entitled to priority. The principle applies also to creditors who do not claim on the basis of a loan, but the liability owned to whom is nevertheless a debt. As has been seen, in respect of monies held in trust, the position as between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o trust could be established and, conversely, if there was an agency, a trust would necessarily follow. None of those assumptions was correct. As I have already pointed out, in order that a sum of money can be claimed from an insolvent company without diminution and in priority over all creditors, it is not necessary that there should be, with respect to it, a full and complete trust. All that is required is that it should be impressed with a character which prevents it from becoming the property of the company and keeps it outside the flux of the company's fortune as respects its own funds by virtue of the special purpose for which it is placed in the hands of the company. Secondly, in order that a deposit made with a company may be said to be held in trust or on terms in the nature of a trust, it is by no means essential that the depositor should be an agent. Nor can, it be said that a deposit made by an agent must always be a deposit made on trust. A deposit made by a customer may well partake of the nature of a trust and a deposit made by a trade agent may well be an advance or advance payment made in the ordinary course of business. 9. A great de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r retained the money in his own hands which he would have liberty to do, he would have to pay interest at the rate of 4/- per cent. The executor did not invest the amount. After the death of the testator, he stated both verbally and in writing that his father had really intended, as he himself had told him, to make a bequest of not 2000/-, but 3000/- and that he would make it that sum in accordance with his father's real wishes. A question having arisen as to whether the only son of the daughter, who had died in the meantime, was entitled to be paid the additional 1000/- out of the estate of the executor, who was the residuary legatee and who also had died all that the Court really decided was that the executor's liability with regard to the 10007- was exactly the same as that with regard to the 20007-and that with regard to the former sum as well there was a complete voluntary trust. It is true that in the course of his Judgment, Lord Romilly, M. R. also held that there was a trust in respect of the 20007- as well, but he did so not by way of holding that the provision for payment of interest did not negative a trust, but by way of holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e beneficiaries named. Where a rate of interest is mentioned, it only means that what the increase shall be in the case of an investment with the trustee himself is quantified and laid down in the trust and the obligation of the trustee is limited to that amount, as distinguished from the actual profits and irrespective of any loss. The transactions in the Privy Council case and the case decided by' the Rolls Court were transactions of this character and constituted trusts. They covered not merely the holding of the trust fund but also the application of the fund with a view to bringing about an increase and payment of the increase to the beneficiaries named. The beneficiary need not be a third party; he may be the truster himself or the truster and, the trustee. So where A pays money to B to be held for a specific purpose for the benefit of himself or of himself and B and also makes it a condition that during the time the money lies in the hands of B, awaiting application to the specific purpose, it shall not remain idle, but shall be invested with B himself who shall pay interest to A at a certain rate, the transaction is not essentially different a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty of a bankrupt and thus available to the trustee in bankruptcy is illustrated by cases like In re, Rogers Ex parte Holland and Hannen (1891) 8 Morr 243 (C) 'in re, Drucker (No. 1)', Ex parte Basden (1902) 2 KB 237 (D) and Rs Watson Ex parte Schipper (1913) 107 LT 783 (E), where it was held that money paid by a third party for the specific purpose of paying a particular creditor of the bankrupt, even if paid with knowledge of the bankruptcy, was impressed with a trust and could not form part of the general assets of the bankrupt, divisible among his creditors. 13. For the foregoing reasons it must be held that the deposit in the present case was impressed with a species of trust, but a further question arises which was not argued at the Bar. It was perhapes not argued because of a consent order recorded by the trial Court on 31-3-1954 and appearing at page 23 of the Paper-book. But I am unable to see how, if the question was to be left to further proceedings as stated then, there could be an unqualified declaration that the entire sum of ₹ 3,01,397-4-3- was held in trust for the respondents alone and an unqualified order for the payment of the wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the position here is that the money was held by the company in trust for the respondents and itself, that is to say, held in the language of the Indian definition of a trust, for the benefit of another and the owner . The law is well-settled that if in such a case the trustee becomes insolvent, the beneficial interest which he himself has in the trust property passes to the trustee in his bankruptcy and becomes divisible among his creditors: see Halsbury's Laws of England, Vol. 2, p. 226. It follows that the proper declaration will be that the amount was held by the company in trust for the respondents as well as itself and that the respondents are entitled to a refund of the amount, less such sum, if any, as may be found due to the company on account of transactions had under the agreement. Any amount deducted as due to the company will be divisible among its creditors. 14. There is one other small point which also was not argued at the Bar, but to which I may refer for the sake of completeness. It might be argued that so far as the interest on the deposit amount was concerned, it was payable under a collateral or ancillary agreement and was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods of the Principal in its own name as products of the Principal. The Agent will be treated as purchaser of the goods ordered by it. 3. The Agent shall keep with the Principal the sum of Rupees Three lacs ear-marked as security for the due performance of the agreement and carrying interest at the rate of five per centum per annum. 4. The return of the said security deposit and interest thereon shall be secured by an unconditional guarantee to be executed by all the Directors of the Principal jointly and severally in favour of the' Agent. The interest on the deposit shall be payable by the Principal to the Agency every month until refunded. 5. The Agent shall procure orders for the products of the Principal and shall forward the same to the Principal for execution on behalf of the Agent. 6. The Principal shall promptly execute the said orders of the Agent and send the goods and the invoices direct to the buyers on account of the agent and will forward copies of the invoices to the Agent. 7. The Principal shall not be responsible for the realisation of the sale proceeds from the buyers introduced by the Agent. 8. The P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and when the Principal terminates the Agency, by a notice it shall not be deemed terminated unless and until the said deposit with interest is so refunded and, the said commission, so paid to the Agent. 17. It appears that the respondent made a deposit of ₹ 3,00,000/- in pursuance of Clause 3 of the agreement and on the same day viz., 4-6-1951, the directors of the company Jointly and severally guaranteed to the respondent due payment of the sum of ₹ 3,00,000/- and the interest thereon. On 7-1-1952 the company went into liquidation and on 15-3-1952 the respondent applied for leave to sue the company in liquidation. On 2-6-1952, the respondent instituted Suit No. 2164 of 1952 on the Original Side of this Court for the recovery of a total sum of ₹ 3,47,875/147-which was made up as follows: ₹ 3,01,397/4/3 was claimed for the deposit under the agreement dated 4-6-1951, together with interest and the balance was claimed for a loan of ₹ 25,000/-' on Khatapeta account alleged to have been advanced on 27-8-1951 at an interest of RS. 6 3/4 per cent per annum. In this suit the company was impleaded as defendant 1 and the Directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J., has held that the agreement dated 4-6-1951 created relationship of principal and agent between the company and the respondent with fiduciary obligations on both sides. This conclusion has been strenuously challenged by Mr. Meyer appearing in support of the appeal. It has been argued that true relationship created by the agreement is that of buyer and seller and strong reliance has been placed upon Clauses 2 and 5 of the agreement which provide that the agent will be treated as purchaser of one goods ordered by it and that the orders procured by the agent shall be executed by the principal on behalf of the agent. It is further argued that if no agency is created by the agreement and if there is no element of fidelity no trust comes into existence with the result that the deposit made by the respondent Is an ordinary unsecured loan and the respondent is entitled to rank as an unsecured creditor of the company. Mr. Chowdhury appearing for the respondent has contended that Clauses 5 arid 10 of the agreement impose upon the respondent the duty of procuring orders for the products of the company and using its best endeavours to promote the sale of the company's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis, however, this duty does not appear to be doing an act for another , because as soon as orders are secured they are to be executed on behalf of the respondent under Clause 5 and as soon as sales are effected the goods will be sold in the name of the respondent. In order to constitute the relation of agency, it is, in my opinion, essential that goods should be sold to customers introduced by the agent' not on behalf of the agent but on behalf of the Principal. If the goods are sold on behalf of the alleged agent and if the alleged agent is to be treated as the purchaser, he ceases to be an agent and becomes a Principal. On a consideration of the agreement as a whole-therefore my conclusion is that it does not create a relationship of principal and agent between the company and the respondent but a relationship 01 seller and wholesale buyer of the products of the company. 20. We have now to consider the question whether the provision about the payment of commission makes any difference in the relationship between 'the company and the respondent. Under Clauses 12 and 13 of the agreement the respondent is to get a commission of 2 per cent upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust or a fiduciary relationship. Bachawat J. has proceeded upon the view that since the deposit was by an agent, to be appropriated towards a specific purpose connected With the agency, it must be impressed with a trust. His view has been influenced to a large extent by a decision of a Division Bench of this Court in the case of 'Kshetra Mohan Das v. Dr. D. Basu' , the facts of which, in his opinion are indistinguishable from the facts of the present case. As all the terms of the agreement in that case are not set out in the judgment as reported, we sent for the paper book of that case and read all the terms. On a comparison of the agreement in that case with the agreement in the present case, however, we find that the terms are essentially different. In 'Kshetra Mohan Das's case (G)', the agreement is truely an agreement between a principal and agent as the agent agreed to sell the goods of the principal on behalf of the principal at a price to be fixed by the principal, whereas in the instant case, the alleged agent is to be treated as, the purchaser of goods and the alleged principal is to execute the orders secured by the alleged agent on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; AIR 1937 Lah 444 '(L). The Calcutta and Madras High courts on the other 'hand have adopted the view that the provision as to payment of interest is not wholly inconsistent with the existence of a fiduciary relationship. See 'In re. Alliance Bank of Simla' , 'In re. Bengal Zemindari and Banking Co.', Ltd.' , and 'In the matter of Travancore National Quilon Bank Ltd.' AIR 1939 Mad 337 (O). The view taken by this Court is based on the judgment of Lord Romilly M. R. in '(1866) 35 Beav. 621 at p. 628 (B)', where a testator made over a certain sum of money to his executor upon trust for his daughter for her life and to pay her interest at the rate of 4 per cent, per annum. Under the terms of the will the executor was authorised to make such use of the capital as he thought fit. Upon these facts Lord Romilly M. R. held that a trustee, if so authorised, could use the trust fund and could be required to pay interest. To the same effect is the decision of the Judicial Committee of the Privy Council in the case of ''. That was a case where a sum of money was handed over to the depositse for the purpose of inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation on the company to hold the deposit for a specific purpose. By Clause 3 the deposit is specifically earmarked as security for the due performance of the agreement . Under the agreement the respondent is liable to pay the company the prices of goods sold to it or to customers introduced by it. Under Clause 11 such prices are to be adjusted within' fifteen days of the delivery or despatch of goods and by Clause 15 the company accepts the liability to refund the deposit with interest on the expiry of two years or on prior determination of the agreement by one month's notice. The combined effect of these three clauses, in my view, is that there is to be an accounting between the company and the respondent in terms of Clause 11 and the respondent is to pay the prices within the period specified in that clause. In the event of the respondent's failure to pay the prices, however, the company would be entitled to deduct the, same from the deposit made in pursuance of Clause 3. Upon this reading of the agreement it is clear that it imposes a contractual liability on the company to hold the deposit for the specific purpose of appropriating it towards th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been raised before us, but Mr. Meyer has placed reliance on certain. observations made by Jenkins L. J. at p. 155 of the report where his Lordship summarises his conclusion in the following words: After paying the 'best attention to the arguments for the Crown and those for the Respondent company I find nothing in the facts of this case to divest those deposits of the character which it seems to me they originally bore, that is to say, the character of loans by the agents to the company, given no doubt to provide the company with a security but nevertheless loans. As loans it seems to me that they must prima facie be loans on capital not revenue account, which perhaps is only another way of saying that they must prima facie be considered as part of the company's fixed and not of its circulating capital. 'At p. 158' Cohen L. J. said as follows: I agree with my brother Jenkins that the dollars deposited for the purposes indicated in the agency agreement were in the nature of loans and were not part of a transaction on revenue account. It is true that in the passage quoted above the deposits made by agents were described as lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured loans. If that be so, it is Impossible to accept the argument advanced on behalf of the appellant that the credit of the amount in the deposit sales account is wholly inconsistent with the idea of trust. 27. Lastly Mr. Meyer argued that the relation between the company and the respondent under the agreement was that of a banker and customer and the only obligation of the company was to return the deposit on the expiry of two years or on earlier determination by notice. Such an , obligation, according to Mr. Meyer, does not entitle the respondent to any priority over unsecured creditors. After giving the matter my best consideration T find myself unable to accept the proposition that under the agreement the only obligation of the company was to refund the deposit on termination of the alleged agency by efflux of time or by act of parties. In my opinion the contingency that is safeguarded by the deposit is the possible failure of the respondent firm to pay the prices of goods sold to it or to customers introduced by it and the company was under an additional obligation to hold the money as security against such a contingency. It is this last ..... 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