In Re: Madras Bangalore Transport Co. (East) by partners

P.R. Gokulakrishnan, J.—This matter comes up on the Report filed by the Official Assignee. The Official Assignee has prayed for issue of

directions as to whether the claims made by certain parties in respect of security deposits they had made with the insolvent-Company are to be

treated as ''trust'' claims entitled to priority payment over other creditors; or whether those depositors should rank as ordinary creditors for

dividend.

Thiru Sivaramakrishnayya, Thiru Vedantam Srinivasan and other learned Counsels appearing on behalf of the persons who had made the

security deposits with the insolvent-Company, strenuously contended that those security deposits should be treated as ''trust'' moneys in the hands

of the insolvent-Company, and that they should be paid in priority to other creditors of the estate.

Thiru Ratan appearing for one of the petitioning-creditors submitted that the deposits in all the cases are contractual obligations with the

relationship only of a ''debtor and creditor'' and as such they cannot be claimed to be ''trust'' moneys in the hands of the insolvent Company,

entitled to priority payment. Thiru Ratan also contended that the most important pointer to hold that they are ''trust'' moneys is segregation of these

amounts from other accounts, and that since there is no segregation provided for, there is no ''trust'' created.

Both sides relied upon a number of decisions to support their respective contentions.

The persons who claim priority payment are the agents and employees of the insolvent-Company and the lorry owners. There is an agreement

as far as the agents are concerned. A model of that agreement has been marked as Exhibit R-1. As far as the employees and lorry owners are

concerned, we have only the receipts given by the insolvent-Company for having received the security desposits. In all these cases the money were

deposited with the involvent. Company as security deposits for the! due performance of their obligations. Exhibit R-3 is a schedule of affairs filed

by the insolvent-Company u/s 24, Presidency Towns Insolvency Act. Item 62 in Exhibit R-3 which is marked as Exhibit R-3 (a), represents

''Agency Deposits (Branches)'' to a tune of approximately 2 lacs of rupees. Exhibit R-4 is a separate ledger for the deposits by the agents,

employees and"" lorry owners. Exhibit R-5 is the cash book of the insolvent-Company.

There are, in all, 78 claims for priority payment to the value of Rs. 2,62,302, 68. All these items relate to ''security deposit'' made by the agents,

employees and lorry owners.

Thiru Sivaramakrishnayya, learned'' Counsel appearing on behalf of the agents, cited the decision in R.B. Seth Jessaram Fatehchand Vs. Om

Narain Tankha and Another, , and contended that after this decision of the Supreme Court there is no need to look into the earlier decisions and

that this Court can decide upon the facts of the present case, in the light of the above decision, the question as to whether the claims made by the

agents, employes and lorry owners for priority payment in respect of their security deposits as ''trust'' moneys in the hands of the insolvent, is

correct or not. According to Thiru Sivaramakrishnayya, the main test for the purpose of construing these amonts as ''trust'' moneys is that there

must be segregation, that there must be absence of provision for interest and that there must be a separate account for commission paid.

As far as the present claims are concerned, there is the separate ledger book Exhibit R-4. There is a clear stipulation to the effect that no

interests will be paid on the security deposits. There is a mention in the agreement Exhibit R-1 to the effect that the principal shall settle the

commission, security deposit, etc., if any, less all the amounts, due to them by way of cheque within 3 months from the date of handing over the

charge to the principal, under normal circumstances. From this, it can be-spelt out that commission and security deposits were treated separately.

R.B. Seth Jessaram Fatehchand Vs. Om Narain Tankha and Another, , is a case in which the question arose as to whether the security deposit

in a particular case can be said to be impressed with a trust. In that case, the appellant deposited a sum of Rs. 50,000 as security for due

performance of a contract and that amount was to carry interest at the rate of six per cent per annum. In 1949 an order was passed winding up the

Mills, and this happened before the period of agency came to an end. Consequent on the winding-up of the Mills, the appellant made an

application in September 1950, by which it prayed for refund of the security deposit along with interest. It was also prayed that the Mills held the

deposit as trustee and in consequence the appellant was entitled to priority with respect to the amount of Rs. 50,000. In addition there was a claim

of Rs. 24,500 with respect to commission, which was ultimately given up. The liquidators contended that the sum of Rs. 50,000 paid as deposit

was only an ordinary debt with respect to which the appellant could not claim any preference. The only question in that case that came up for

decision was whether the amount of Rs. 50,000 deposited as security for due performance of sole selling agency was in the nature of a trust which

was entitled to preference or was an ordinary debt.

9-A. Clauses (8) and (9) of the agreement in that case were as follows:

(8) That the firm has deposited a sum of Rs. 50,000 with the said Mill as a security for the due performance of the contract on their part, on which

amount the Mill shall pay interest to the said firm at the rate of 6 per cent per annum.

(9) That the Mill shall refund the said security deposit of Rs. 50,000 with interest thereon at that rate on termination of the agency. In case the said

amount is not refunded with interest thereon the firm shall be entitled to commission at the rates mentioned above as if the agency has not

terminated. In other words as long as security with interest is not refunded and commission due is not paid this agreement will not be terminated.

The Supreme Court has observed:

It will be seen from the terms of the agreement already set out that there was no stipulation that the amount of Rs. 50,000 deposited as security

would be kept as a separate fund by the Mills and it would not use it for its own purposes. On the other hand, it is clear that interest had to be paid

and there was nothing in the agreement to prevent the Mills from using the money as its own so long as it paid interest on it. It is true that the money

was to be refunded along with interest on the termination of the agency, but Clause (9) further provided that in case the money was not refunded

after one year, the appellant would be entitled to commission as if the agreement had not terminated. As the agreement itself puts it, it will remain

alive even after the period of one year so long as the security with interest was not refunded and the commission due was not paid. The last word

of Clause (9) of the agreement put the security deposit and the commission due on the same footing. It is because of this provision that the learned

company Judge held that as the security deposit and the commission due were put on the same footing and the commission could only be a debt,

the security deposit in the circumstances of this agreement could not be treated on a higher footing. It seems to us that the view taken by the

learned Company Judge so far as this agreement is concerned (which was upheld by the Division Bench) is correct.

The Supreme Court further held:

The question whether the security deposit in a particular case can be said to be impressed with a trust will have to be decided on the basis of the

terms of the agreement and the facts and circumstances of each case without any leaning one way or the other, on the fact that the money was

given as a security deposit. If the terms of the agreement, if it is in writing, clearly indicate that the deposit was in the nature of a trust, the Court will

come to that conclusion in spite of the fact that interest is provided for in the agreement. But where the terms of the agreement do not clearly

indicate a trust, the Court will have to consider the facts and circumstances of each case along with the terms to decide whether in fact something in

the nature of a trust was impressed on the security deposit. In such a case the fact whether segregation was provided for or not would be one

circumstance to be taken into consideration. where segregation is provided for, the Court would lean towards the deposit being in the nature of a

trust. But where segregation is not provided for and the deposit is permitted to be mixed up with the funds of the person with whom the deposit is

made, the Court may come to the conclusion that anything in the nature of trust was not intended, for generally speaking in view of Section 51 of

the Indian Trusts Act (II of 1882) a trustee cannot use or deal with the trust property for his own profit or for any other purpose unconnected with

the trust.... But where there is no clear indication that a security deposit was impressed with trust, absence of segregation would be a circumstance

against there being a trust.

Another circumstance which may have to be taken into account in a case where the agreement does not indicate clearly that the security deposit is

impressed with a trust is the payment of interest. Where there is no payment of interest provided for an inference may be readily drawn that the

deposit was in the nature of a trust.

After thus discussing the various circumstances which will go to show that a security deposit is a ''trust"" created, the Supreme Court, on the facts

and circumstances of that particular case, came to the conclusion that there was no ''trust'' created to claim priority payment.

Relying upon the principles in the Supreme Court decision, Thiru Sivaramakrishnayya, the learned Counsel, stated that there is segregation

under Exhibit R-4 in respect of the amounts claimed by way of security deposits, that there is absence of provision for interest and that there is no

mixing-up of commission and security deposits. As such, the learned Counsel submitted that these claims are cases of ''trust'', entitling the persons

who had made the security deposits to have priority claim.

Thiru Vedantam Srinivasan, the learned Counsel appearing for some of the persons who had made the security deposits, supporting the

arguments of Thiru Sivaramakrishnayya, relied on some more decisions in support of the said view. No doubt, all these decisions cited by him have

been given a quietus in the wake of the decision in the aforesaid Supreme Court case. Nevertheless both Thiru Vedantam Srinivasan and Thiru

Ratan cited cafes prior to the aforesaid Supreme Court decision for the purpose of appreciating the principles arrived at in the Supreme Court

decision.

Thiru Vedantam Srinivasan cited In re, The Hindustan Commercial Bank (1538) 8 Comp. Cas. 101 wherein Gentle, J. dealing with a case of

security deposit made by the employees, held that even though those deposits were put in as fixed deposits, those moneys were trust moneys in the

hands of the Bank and remained as such so long as they remained in the hands of the Bank and that the trust moneys could be followed so as to

reach the assets of the Company from whatever source they might come and consequently the assets of the Company coming into the hands of the

official liquidator must be earmarked first of all to the discharge of the claims of the depositors including interest up to the date of the liquidation.

In Gopalakrishnan v. Official Liquidator T.N. and Q, Bank Ltd. (1939) 9 Comp. Cas. 60, Venkataramana Rao, J., dealing with a case of

''cash security'' given by an employee, held that the relationship between the Bank and the employee in respect of the security was not one of

''debtor and creditor'' but one of ''trustee'' and ""cestui que trust"" and that the Bank must be deemed to hold the amount in a fiduciary capacity. The

learned Judge further held that when a sum of money is handed to another person who accepts it for a purpose declared at the time a binding trust

is constituted in respect thereof and that the fact that the person to whom the money is handed over happens to be the bank does not affect the

principle. The further observations are-

The word security deposit connotes that the money does not belong to the banker as in the case of an ordinary deposit but is money belonging to

the depositor. The fact that in certain contingencies the bank might have recourse to the deposit does not confer any beneficial interest therein in the

bank nor make the bank a beneficiary. The fact that the deposit receipt allows payment of interest which would imply the bank being permitted to

use the moneys does not render the relation between the bank and"" the employee any the less that of a trustee and a cestui que trust.

Ganesh Export and Import Go. v. Mahadeolal Nathmal (1955) 25 Comp. Cas 357, is a Division Bench decision of the Calcutta High Court.

On the facts of that case, it was held that the agreement imposed a contractual liability on the company to hold the deposit for the specific purpose

of appropriating it towards the unpaid prices of goods sold or supplied and therefore the respondents were entitled to the refund of the balance of

the deposit in priority after deduction therefrom of any sum found due to the company. Dealing with the question, Chakravarthi C.J., has observed:

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.

It has been further stated:

Property held by an insolvent in a fiduciary capacity is treated as property held in trust for the purposes of the insolvency laws and property held

for a specific purpose is treated as clothed with a species of trust subject to the same principles as trust property"" ""The test as to whether there is a

loan or a trust in such a case appears to be this:

Where money is paid merely on condition of repayment and payment of interest till then, there is only a loan; but where the main condition on

which money is paid shows that the corpus of the fund is being handed over in confidence to be held for the benefit of some person or object, the

provision for payment of interest is a only a provision for an increase or improvement of the fund and there is no loan but a trust, despite such

provision which does not in any way negative a trust.

In D. V. Narain v. Aarson Spinning and Weaving Mills Ltd. (1961) 31 Comp. Cas. 261, a Bench of the Kerala High Court has held that the

deposit in that case was earmarked for a specific purpose and, therefore, was impressed with the character of a trust and that it really did not form

part of the funds of the company, and the petitioner was, therefore, entitled to preferential payment of the amount in full. That was a case where the

petitioner had deposited in cash with a company the sum of Rs. 5,000 as security for any claims arising out of the agency given to the petitioner

and in liquidation of the company it had no such claim against the petitioner.

There is a Privy Council decision in AIR 1933 148 (Privy Council) where a claim of priority payment in respect of a trust from the insolvent''s

estate has been discussed and upheld.... It is stated there;

Once a trust is established, the right of the cestui que trust to follow the trust property or the proceeds thereof does not depend on a rightful or a

wrongful disposition of the property by the trustee. As between the cestui que trust and the trustee, and all parties claiming under the trustee,

otherwise than by purchase for valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered

in its nature or character, and all the fruits of such property, whether in Its original or in its altered state, continue to be subject to or affected by the

trust.

Thiru Vedantam Srinivasan also cited the decision in Barclays Bank Ltd v. Quistclose Investments Ltd. (1969) 39 Comp. Cas. 105, wherein

an implied trust was spelt out in equity. On the facts and circumstances of that case, the House of Lords held that there was a clear 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.

From the above decisions, Thiru Vedantam Srinivasan, the learned Counsel appearing on behalf of certain agents, stated that the security

deposits are only in the nature of trust and that once it is found that it is in the nature of trust, priority must automatically follow. No doubt, the main

question to be decided is as to whether the present claims where deposits had been made as security deposits can be taken as creation of ''trust''.

According to Thiru Vedantam Srinivasan, they are definitely in the nature of trust in view of the decisions cited above and also in view of the

decision rendered by the Supreme Court in R.B. Seth Jessaram Fatehchand Vs. Om Narain Tankha and Another, .

Thiru Ratan, the learned Counsel appearing on behalf of an unsecured creditor contended that the security deposits In this case create only

contractual obligations and there is only a ''debtor and creditor'' relationship. He also contended that there is no question of any segregation

provided when the alleged ''trusts'' were created and as such there is no question of any trusts for purposes of claiming priority inasmuch as the

main pointer, i.e., segregation, is not made in respect of the moneys given by the various parties as security deposits. Thiru Ratan submitted that

there Is no question of any trust created In respect of these claims. He read from ''Lewin on Trusts'' certain passages : at page 1-

A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the

trust property) for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he may himself be one, and any one of

whom may enforce the obligations.

at page 4-

Any property may be held upon trust, including, e.g., the legal estate in land, the legal property in chattels, a chose in action such as the benefit of a

contract, an equity of redemption and a beneficial interest under another trust.

The learned author has further stated that there are three essentials for the creation of a ''trust''.

At page 41, he has stated;-

As a general rule it has been laid down, that when property Is given absolutely to any person, and the same person is by the giver who has power

to command, recommended, or entreated or wished, to dispose of that property, in favour of another, the recommendation, entreaty or wish shall

be held to create a trust:

First, If the words are so used, that upon the whole, they ought to be construed as imperative,

Secondly, if the subject of the recommendation or wish be certain; and, Thirdly, if the object or persons intended to have the benefit of the

recommendation or wish he also certain.

The ''three certainties"" which must be found in a declaration of trust are therefore certainty of words, certainty of subject-matter, and certainty of

objects.

Even in ''Snell''s Principles of Equity'' (twenty-sixth edition), the author says at page 122.

It was laid down by Lord Langdale M.R. that for the creation of a trust three things are necessary:

(i) The words must be so used that on the whole they ought to be construed as imperative;

(ii) The subject-matter of the trust must be certain; and

(iii) The objects or persons intended to have the benefit of the trust must be certain.

These are called ''the three certainties''.

R.H. Maudeley on ''Hanbury''s Modern Equity'' has stated at page 85:

A trust is a relationship recongised by equity which arises where property is vested in (a person or) persons called the trustees, which those

trustees are obliged to hold for the benefit of other persons called cestui que trust or beneficiaries. The interests of the beneficiaries will usually be

laid down in the instrument creating the trust, but may be implied or imposed by law. The beneficiaries'' interest is proprietary in the sense that it

can be bought and sold, given away or disposed of by will; but it will cease to exist if the legal estate in the property comes into the hands of a

bona fide purchaser for value without notice of beneficial interest. The subject-matter of the trust must be some form of property. Commonly, it is

legal ownership of land or of invested funds; but it may be of any sort of property-land, money, chattels, equitable interests, choses in action, etc.

There may also be trusts where there are no ascertain-able beneficiaries. There is no difficulty where such trusts are for charitable purposes; such

trusts are enforced at the suit of the Attorney-General. But there is much doubt and uncertainty as to the status and validity of trusts for non-

charitable purposes-as a trust for the building of a monument or for the maintenance of the testator''s horses dogs and cats.

A trust must be distinguished from certain other legal phenomena which resemble the trust, but which must be kept separate from it.

The author dealing with ""debt"" has stated, at page 88:

A debt may or may not be contractual. Whether the obligation is contractual or not, the duty of the debtor is to pay money to the creditor; that of a

trustee is to hold the trust property on trust for the beneficiary. The debtor''s obligation, like that of the agent, is personal. The trust is proprietary.

''Williams on Bankruptcy'', dealing with ''following trust money'' has put it thus, at page 287:

The question of following trust money, or money the proceeds of trust property, was considered in Re Hallett''s Estate (1879) 13 Ch.D. 695,

where it was held that if money held by a person in a fiduciary character though not as trustee, has been paid by him into his bank account, the

person for whom he held the money can follow it, and has a charge on the balance in the banker''s hands; but the right to follow the money can

only arise when the intermixture of it was wrongful.

Thiru Ratan cited the decision in Official Assignee of Madras v. Sabapathy Mudaliar (1912) 14 I.C 571 : 23 M.L.J. 221. In that case, money was

deposited by an employee of a Banking firm with the firm : as security for the due performance of his duties and the firm placed it in fixed deposit in

the name of ""ourselves, account of security for the depositor"", and the deposit carried interest. In such circumstances, the Division Bench held that

the depositor can only be ranked as an ordinary creditor of the Bank, when the latter suspended payment and were adjudged insolvent, even

through the depositor had no knowledge of the manner in which his security was treated by the Bank.

Thiru Ratan, the learned Counsel, also cited the decisions in Official Assignee of Madras v. Krishaswami Naidu ILR (1910) Mad 154,

Malvankar v. Credit Bank of India Ltd. (1915) 27 I.C. 343, Official Assignee of Madras v. Society for Promotion of Christian Knowledge (1910)

6 I.C. 240, and Ganesh Export and Import Co. Vs. Mahadeolal Nathmal, , wherein it has been held, on the facts of those cases, that the money

deposited as security was not the creation of a ''trust'' entitling the depositor to have priority payment.

Thiru Ratan also submitted that in view of the decision in R.B. Seth Jessaram Fatehchand Vs. Om Narain Tankha and Another, . It is not

necessary to look into decisions prior to it. Thiru Ratan, interpreting the above Supreme Court decision, submitted that the main pointer to decide

the nature of trust is segregation of the amount. According to the learned Counsel, the so-called security deposits have been mixed up with the

capital of the Company and as such there is only contractual obligation as between the parties which will not entitle the persons who had made the

security deposits to claim priority. He also pointed out that the payment or non-payment of interest may not have any significance once the Court is

not able to conclude that the security deposit is in the nature of a trust. He further submitted that the beneficiaries are not the depositors and the

moneys deposited are intended to be adjusted for any loss that may accrue to the insolvent-company. From the definitions relied on by Thiru Ratan

from the various Text-books above noticed, he is of the view that there is no question of creation of any trust since the three certainties to

constitute a ''trust'' are not present in the present claims.

Thiru Sivaramakrishnayya and Thiru Vedantam Srinivasan repelling the contentions of Thiru Ratan submitted that the three certainties are there

is the deposits made by the agents, employees and the lorry owners. As far as the agreements entered into by the agents, a model of which has

been marked as Exhibit R-1, are concerned, it is clear that if there is any deficit in the security deposit such deficit shall be made good by the agent

forthwith and that the security deposit shall not bear any interest. From these clauses in the agreement, the learned Counsel submitted that there is a

clear intention to keep the security deposit separate from the commission payable to the agents and also to earmark the same as trust to benefit the

persons who had made the deposits. The words used in Exhibit R-1 and also in the other receipts passed by the Company to the employees and

the lorry owners are imperative to construe the deposits as ''trust'' and that the trust is certain and intended to benefit certain specified persons.

The argument as if the moneys have been mixed up with the capital of the Company cannot be pressed home in the circumstances of the

present case, inasmuch as the depositors never had control over the activities of the Company. When they made the security deposits, they

intended to create a ''trust'' in the hands of the Company to benefit them. The deposits have been entered in Exhibit R-4 which is a separate ledger

for the purpose. In Exhibit R-3 also, which represents the schedule of affairs of the Company under, Section 24 of the Presidency Towns

Insolvency Act, an amount of approximately 2 lacs of rupees has been shown as ''agency deposits''. All these go to prove that there has been

segregation of these amounts, that there is absence of provision for interest with regard to such deposits and that the commission account is kept

separate. However much the Company has mixed up the deposit moneys with its capital, the same cannot mean any the less a ''trust'' since the

cestui que trust can follow it in whatever form the deposit now remains.

Taking into consideration the principles evolved in R.B. Seth Jessaram Fatehchand Vs. Om Narain Tankha and Another, , and also in the

decisions cited by the learned Counsel on both sides, I am of the view that the facts and circumstances relating to the claims concerned in this case

do warrant the conclusion that the security deposits come under the purview of the definition of ''trust'' and as such the amounts covered by the

security deposits made by the agents, employees and lorry owners must be treated as ''trust'' moneys in the hands of the insolvent-company,

entitling, the depositors to claim priority in payment of the same. In these circumstances, the claims made by the above-said persons should be

treated as ''trust'' claims and they must be paid in priority to other creditors of the estate.