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TMI Blog1955 (1) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ute its assets among the creditors and thereafter, if there be a surplus, among the contributories, subject to the 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. 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 52(1) ( a ) of the 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general law, monies borrowed by a person become the property of the borrower, 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 owed to whom is nevertheless a debt. As has been seen, in respect of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. A great deal of argument took place before us as to wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2,000, but 3,000 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 1,000 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 1,000 was exactly the same as that with regard to the 2,000 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 2,000 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 that although the money had not been separated from the estate, there was, nevertheless, a completed trust, because the testator had allowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 trustor himself or the trustor 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 and the provision for payment of interest does not take away from its nature of a trust. It does not take away from the nature of a trust, because it is included among the terms of the trust itself, the obligation under it being a further obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 perhaps not argued because of a consent order recorded by the trial court on the 31st March, 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 there, there could be an unqualified declaration that the entire sum of Rs. 3,01,397-4-3 was held in trust for the respondents alone and an unqualified order for the payment of the whole sum out of the entire assets of the company, as made by the trial court. It is true that the deposit was made for a specific purpose but the specific purpose was not simply return of the deposit upon the termination of agreement but included application of such part of the deposit as might be required for the payment of outstanding dues of the company, arising out of transactions under the agreement. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aws 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. 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 ear-marked as security and therefore it constituted only a debt for which the respondents would have to take their chance along with the general body of creditors. Where the terms of a trust include the raising of profits on the trust fund and application of the profits for a particular purpose such as payment to a particular beneficiary, no difficulty arises. A trust clearly attaches to the payment of the profits or the interest as well. A case of the present type where the interest on a securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 principal shall, however, be responsible for the quality of the goods so consigned by the principal to the buyers introduced by the agent. 9.The agent shall sell the products of the principal at the con trolled rates or such other rates as may be prevailing in the market. 10.The agent shall use its best endeavours to promote the sale of the products of the principal and propagate the sale of its products. 11.The prices of the goods purchased by the agent on its account or ordered to be supplied on its own account shall be adjusted within fifteen days from the delivery or despatch of the goods by the principal or immediately on realisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1952, on the Original Side of this court for the recovery of a total sum of Rs. 3,47,875-14-0 which was made up as follows: Rs. 3,01,397-4-3 was claimed for the deposit under the agreement dated June 4,1951, together with interest and the balance was claimed for a loan of Rs. 25,000 "Khatapeta" account alleged to have been advanced on August 27,1951, at an interest of Rs. 6 per cent. per annum. In this suit the company was impleaded as the first defendant and the directors were impleaded as defendants Nos. 2 to 6. No writ of summons was taken out against the company, but the directors were served with summons in the usual course. On August 20, 1952, the respondent applied for a summary judgment against defendants Nos. 2 to 6 ( i.e., the directors) and obtained it on September 3, 1952. The director defendants filed an appeal against the decree, but the appeal was subsequently abandoned. The result therefore is that the respondent has got a money decree against the directors of the company as guarantors for the entire sum of Rs. 3,47,875-14-0 with interest thereon at the rate of 6 per cent. per annum from the date of the decree until realisation. The period of two years fixed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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. Chaudhuri appearing for the respondent has contended that clauses 5 and 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 products. Under clauses 12 and 13, the respondent is to get a commission of 2 per cent. upon the invoiced value of all the goods sold by the company either directly or through the respondent or any other agent or sub-agent and under clause 11 the prices of the goods sold to the respondent or to customers introduced by the respondent are to be adjusted within fifteen days of the delivery of the goods or immediately on realisation of the sale proceeds of the goods from the buyers. These conditions, according to Mr. Chaudhuri constitute the respondent an agent of the company in the true sense. In order to decide this question, we have to bear in mind that the agreement in express terms describes the company as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent between the company and the respondent but a relationship of seller and wholesale buyer of the products of the company. 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 the value of all goods sold by the company either directly or through the respondent or through any other agent of sub-agent subject to a minimum of Rs. 24,000 per year. Clause 5 of the agreement which imposes upon the respondent the duty of securing orders for the company's products does not, however, require that if the orders secured by the respondent fall below a specified minimum limit, it will not be entitled to any commission. On the other hand clauses 12 and 13 make it plain that the respondent will earn its minimum commission even if it does not secure any order whatsoever for the company. In these circumstances the only conclusion that can be drawn is that the word "commission" as used in the agreement does not connote remuneration for the work done by an agent. Mr. Meyer has cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 behalf of the latter. The agreement in the present case being an agreement between two principals the fiduciary obligation of an agent to account for his dealings to the principal cannot be said to exist. The only obligations of the respondent in the instant case is an obligation to pay for the prices of commodities sold to it or to customers introduced by it. Such an obligation in my opinion does not constitute a fiduciary relationship. The next question is whether the deposit in the present case can be said to be impressed with a trust. On a careful consideration of the agreement as a whole it seems to me that it contains no element of fidelity or confidence which is an essential ingredient of trust as defined by section 3 of the Indian Trusts Act. The agreement is bilateral and whatever rights are secured to the parties under it are contractual rights. Under the third clause of the agreement the company is binding itself in express terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay interest. To the same effect is the decision of the Judicial Committee of the Privy Council in the case of The Official Assignee of Madras v. T.K. Bhatts [1933] LR 60 IA 203 . That was a case, where a sum of money was handed over to the depositee for the purpose of investment in the depositee's business in the name of the depositor's son, who was then a minor and the depositee undertook to refund the deposit on the minor's attaining the age of 21 and in the meantime to pay interest at the rate of 9 per cent. per annum. Upon the depositee being adjudicated insolvent the question arose whether the depositor's son would rank as an unsecured creditor or had a preferential claim in respect of the deposit. Before the Privy Council it was sought to be argued that the circumstances under which the deposit had been made did not constitute a trust, but a mere advance in respect of which the depositor's son could claim no better right than that of an unsecured creditor. Their Lordships, however, did not allow this point to be raised because the trust was admitted both before the original Court and the Court of Appeal and also in the printed case before the Privy Council. This cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the unpaid prices of goods sold or supplied to the respondent in the event of the letter's failure to pay. It is this contractual obligation of the company that protects the right of the respondent to the extent of the balance of the deposit that may remain after deducting the unpaid prices of goods sold to or at the instance of the respondent. From the affidavit of the joint liquidators it would appear that, according to them, there are outstanding dues against the respondent for prices of goods; but the exact amount due, if any, has not been ascertained. There must therefore be an accounting between the company and the respondent with regard to the prices of goods sold to the respondent or to customers introduced by it. If upon such accounting any sum is found due to the company it will be deducted from the deposit and will be available for distribution amongst the unsecured creditors of the company. The balance, if any, will, however, be treated as the property of the respondent. In aid of his argument t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. " It is true that in the passages quoted above the deposits made by agents were described as loans, but their Lordships were only considering the question whether the deposits were capital or trading receipts. Their mind was not addressed to the question whether the deposits were secured or unsecured loans or whether the deposits were impressed with a trust. The word "loan" is a genus which includes unsecured as well as secured loans and loans impressed with a trust. The description of deposits by agents as loans is no solution of the problem with which we are confronted, i.e., whether they are loans impressed with a trust. Their Lordships certainly did not intend to lay down the general proposition that agency deposits must be treated as unsecured loans in all cases. For these reasons, I am of the opinion that the decision in the case of Davies v. The Shell Company of China [1951] 32 Tax Cas 133 , is of no assistance to the appellant. Mr. Meyer relied up on the description of the deposit as "advance" in the plaint of Suit No. 2164 of 1952, before its amendment and also in two affidavits of one Gajanand Himatsingka affirmed on behalf of the respondent. He has also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last obligation which takes the deposit out of the category of unsecured loans and protects the respondent's right in respect of the balance of the deposit that may remain after deducting its dues to the company. For the reasons given above, the appeal is allowed in part and the order made by Bachawat, J., modified. In lieu of the declaration made by him, it is declared that the sum of Rs. 3,01,397-4-3 is held by the company for a specific purpose in the nature of a trust for the benefit of the applicant firm and itself and in lieu of the order for payment made by the learned Judge it is ordered that the applicant firm will be entitled to repayment of the aforesaid sum out of the entire assets of the company, less such sum, if any, as may be found due from it to the company on account of transactions had under the agreement. Upon the amount due to the applicant firm being determined, it will be entitled to apply to the court for the payment of such amount within six weeks from the date of such determination. The rest of the order of the learned Judge will stand. There will be no order for costs in this appeal, but the official liquidators shall be entitled to retain and pay thei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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