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TMI Blog1975 (4) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 1967, the Baroda Spinning and Weaving Mills Ltd. (hereinafter referred to as "the company") was ordered to be wound up by an order dated 17th April, 1968, and the official liquidator was appointed as the liquidator of the company. The liquidator proceeded to take into its custody all the property, effects and actionable claims to which the company was entitled. The liquidator also took into his custody the books of accounts and other documents of the company. After the statement of affairs was filed, the liquidator in the course of examination of the books of accounts of the company, came across an entry showing a credit balance to the extent of Rs. 86,166,86 in the account of the Baroda Spinning and Weaving Mills (Rajratna Sheth Jhaverchand Laxmichand) Co-operative Credit Society Ltd., hereinafter referred to as "the society". In response to the advertisement inviting the creditors of the company to prove their debts or claims and to establish any title they may have to priority under section 530 of the Companies Act, the society approached the liquidator with a request that the amount standing to their credit in the books of accounts of the company was held in trust by the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistrar and registered by him. Any member desirous of taking a loan had to make an application in the prescribed form and the prescribed form which is annexed to the affidavit shows that the member taking the loan agreed to repay in the manner set out in the form, it being that the member who is the employee of the company would permit deduction of the monthly instalments, as also the amount of compulsory saving and the interest payable by him on the loan taken by him from the salary or wages which he is to receive from the company month to month. The tripartite arrangement worked out between the company, the society and the members of the society appears to be that on an application being made by the member, the society would advance a loan and the member, in turn, would agree to repay the loan by equal monthly instalments by the company deducting the amount of instalments from the wages payable to him month to month and the company paying over the money to the society. There appears to be a tripartite arrangement which has been in vogue since the incorporation of the society. The society accordingly claimed that the amount so deducted by the company from the wages of its employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t but made only oral submission. Mr. V. B. Patel, learned advocate, appeared for the liquidator and assisted the court in arriving at a correct decision on this thorny question. Section 456 of the Companies Act provides that on a winding-up order being made and the liquidator being appointed, he shall take into his custody or control all the property, effects and actionable claims to which the company is or appears to be entitled. He should also take into his custody the books of accounts and other documents of the company. The object of the winding-up proceedings of a company is to collect all the assets, properties and choses-in-action belonging to a company under liquidation and to distribute them to various persons having claim against the company keeping in view priorities fixed by various provisions of the Companies Act. Ordinarily, a liquidator after collecting all the assets, properties and claims in favour of the company would first pay up any secured creditor if he has not chosen to remain outside the winding up and then a preferential creditor and thereafter unsecured creditors and balance amongst the contributories. While collecting the assets of the company it will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the legal and beneficial ownership of the property is in the company. If the company had merely a custody of the property without either a beneficial or legal ownership in the property, it would not form part of the asset of the company and the liquidator cannot take it over for the purpose of distributing it amongst the creditors of the company. The question, therefore, is what is the title of the company to the amount found standing to the credit of the society in the books of accounts of the company on the date on which the company was ordered to be wound up. The facts as set out earlier from the affidavit of the vice-president of the society are not in dispute. The society was incorporated for the avowed object of promoting and encouraging thrift and saving amongst its members, as also to advance loans on easy terms at moderate interest. The membership of the society was exclusively open to the employees of the company. A tripartite arrangement appears to have been worked out between the society, the members and the company by which it was agreed that the society would advance loans and make it obligatory upon the members to save a certain amount depending upon the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Government or any officer specified by it in this behalf or to a scheme of insurance maintained by the Indian Post Office." It was attempted to be urged that the deduction was made by the company on the requisition of the society, which requisition was pursuant to an agreement set out in every application for loan and the bye-laws of the society, and, therefore, it can be said with confidence that the deduction would be governed by clause ( ii ) because it is made with the written authorisation of the employed person. Even if the deduction could be said to have been made with the written authorisation of the employed person it would still not be covered by clause (2)( ii ) because the clause by its language is limited to a deduction made with the written authorisation of the employed person for a particular purpose, such as contribution to the National Defence Fund or to any Defence Savings Scheme approved by the State Government. Not each and every deduction made with the written authorisation of the employed person would be permissible under clause ( ii ) because that would throw open the flood gates for unauthorised deduction under the pretext that it was made with the wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to such an employee such amount as may be specified in the agreement and to pay the amount so deducted to the society in satisfaction of any debt or other demand owing by the member to the society. If, therefore, a conclusion could be reached that the company made deductions from the wages of such of the employees of the company, who were members of the society, pursuant to a requisition served by the society, such deductions would be legal and valid under section 24-A. But before any deduction from the wages of an employed person could be validly made, it must squarely fall within any of the sub-clauses of section 7 and the only sub-clause relevant for a situation which is under discussion would be clause ( j ), and in order to meet with the requirement of clause ( j ), the employer can make a deduction from the salary or wages of his employees for payment to the co-operative society approved by the State Government and there is nothing to show that the society herein concerned is approved by the State Government. Clause ( j ) postulates deduction for payment to the co-operative society, which must be a co-operative society approved by the State Government, while section 24-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntemplated by section 7( j ) of the Payment of Wages Act. This construction of section 24-A would reconcile the apparent conflict between section 24A of the Co-operative Societies Act and section 7( j ) of the Payment of Wages Act, because it was open to the State Government to approve all co-operative societies for the purpose of section 7( j ) of the Payment of Wages Act. Instead of the executive Government approving all the co-operative societies in the State by a notification the legislature of the then Bombay State, by introducing section 24-A, gave concrete form and shape to the provisions contained in section 7( j ) of the Payment of Wages Act by giving statutory recognition to the requirements of section 7( j ) by enacting section 24-A in the Co-operative Societies Act enabling a member of any co-operative society to execute an agreement in favour of the society providing that the society would be in a position to recover dues of the member from the employer of the member by making appropriate deductions from the wages or salary of such member by his employer and that such deduction would be permissible deduction within section 7( j ) of the Payment of Wages Act. When the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the wages made to the workmen. Whatever little conflict that comes to surface while reading section 7( j ) of the Payment of Wages Act with section 24-A of the Bombay Co-operative Societies Act vanishes into thin air once the Bombay Co-operative Societies Act, 1925, is repealed and replaced by the relevant provisions contained in section 50(1) of the Gujarat Co-operative Societies Act. Therefore, viewed from either angle, the deduction from the wages of an employee who is a member of a co-operative society at the instance of the co-operative society for satisfying the debt or demand of the society from the member by the employer of such member pursuant to the requisition made by the society would be wholly covered by the provisions of the Payment of Wages Act and would be legal and valid. Undoubtedly, such deduction must be pursuant to an agreement between the co-operative society and its member and the law does not require that there should be a tripartite agreement between employer, an employee and the co-operative society of which such employee is a member. In fact, an agreement between the society and its member as envisaged by section 50(1) would impose a statutory liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the employer for having failed to remit it to the society. In determining this question, sub-section (3) cannot come in the way nor can it be said that the whole of section 50 provides the procedure for determining priority in payment to creditors of a co-operative society. In fact unless such extreme case comes up where a member of one co-operative society is an employee of another co-operative society and the employer co-operative society is ordered to be wound up, sub-section (1) of section 50 would not come into play for determining the priority in payment of debts of such co-operative society in liquidation. Sub-section (3) only provides for a contingency where in the case of insolvency of the individual or liquidation of a company priority in payment is accorded to wages for a specified period and an argument may be advanced that once deduction from wages is made the amount so deducted has ceased to be wages and no priority in payment can be claimed. To avoid such a contention it is provided that even after deduction the amount retains the character of wages till it is paid over to the society. It was incidentally contended that section 50 cannot come into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispute between the company, the society and the employees both about the right to deduct, the actual deduction and the liability to remit the amount so deducted. The ratio of the aforementioned two decisions, therefore, would not come in the way of the court deciding the principal question as to what is the character of the amount deducted by the company and remained with it at the time of winding-up. It is at this stage necessary to examine one contention, namely, that it may be that the society may have invested its surplus funds with the company and the company was not under any disability to receive such deposits and pay interest thereon. Proceeding from this basic formulation, it was contended that if over a period it is found that the society was depositing its surplus funds by not insisting on prompt remittance of the amount deducted by the employer from the wages and salaries of the employees who were members of the co-operative society and that amount was so allowed to remain with the employer to be demanded as and when necessary, the amount would have the characteristic of a deposit in the hands of the employer and the relationship between the society and the company wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verned by the provisions of the Co-operative Societies Act has certain statutory limitations on the investments of its surplus funds. It is not necessary to examine the relevant provisions under the Baroda Sahakari Societiona Nibandh but section 37 of the Bombay Co-operative Societies Act provides for investment of funds. A bare perusal of it would show that the co-operative society governed by the provisions of the Bombay Co-operative Societies Act, 1925, is not entitled to deposit or invest its surplus fund with the company. Similar is the provision contained in section 71 of the Gujarat Co-operative Societies Act. Undoubtedly, there is an addition of sub-clause ( g ) which provides that the society may invest its funds in any other mode permitted by the rules, or by general or special order of the State Government; but I was informed that there are no such rules, nor are there any general or special orders which would enable the society to deposit its surplus fund with the company. Therefore, both on the factual appraisal of the situation as well as on the statutory provisions a firm conclusion could be reached that the amount which remained in the hands of the company was not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aracter qua the company. But in view of the tripartite arrangement and statutory liability of the company as employer to remit the amount to the society, the society had legal title to the amount so deducted. The society would thus acquire the character of a principal. In purely legal parlance the moment deduction was made by the company from the wages and salary for the sole purpose of remittance of the amount to the society, the society would be the principal and the company would be the agent. "Agent" is defined in section 182 of the Indian Contract Act to mean a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or is so represented is called the "principal". Section 218 defines "agent's duty" in respect of sums received by him for and on behalf of the principal. It provides that subject to such deductions, the agent is bound to pay to his principal all sums received on his account. Viewed from this angle, the company held the money as mere custodian, without any title to it, for and on behalf of the society and if that be so, the company was bound to hand over the amount collected by it by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for and on whose behalf the property is held to account for the same and such person would not be allowed to retain the property or refuse to account for moneys received even if it be on the ground that the property or moneys have come into his hands as proceeds of illegal transaction (See Sita Ram v. Radha Bai AIR 1968 SC 534.). In the absence of an indenture of trust, the court will have to consider the facts and circumstances of each case whether the person in whose hands the property was found is a quasi-trustee or not. Proceeding from this angle, there is a consistent line of cases in which it is held that where the property or money is given to a person for a specific purpose and if the purpose fails, the property or money in the hands of the person would acquire the character of quasi-trust. In Quistclose Investments Ltd. v. Rolls Razor Ltd. (In liquidation) [1968] 38 Comp. Cas. 810 (CA). Sachs L. J. observed : "There is a consistent line of cases over the last 140 years according to which money advanced by A to B for a definite purpose can be impressed with a trust." In this connection, three cases may be worthy of note. In Toovey v. Milne [1819] 2 B Ald ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 the 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 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. (See Ganesh Export Import Co. v. Mahadeolal Nathmal [1955] 25 Comp. Cas. 357 (Cal.) ). The Madras High Court after an exhaustive discussion of all the Indian and English cases bearing on the subject in Official Liquidator v. N. Chandranarayanan [1973] 43 Comp. Cas. 244 (Mad.) held that where money was paid for a specific purpose and the purpose failed money had to be returned as being impressed with the character of trust. In the case before the Madras High Court, Manasuba Co. (Pvt.) Ltd., the company in liquidation, obtained from Chandranarayanan a sum of Rs. 40,000 under an agreement to enable it to deposit the sum with a paper mill for being appointed as one of its stockists. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trust. The mere fact that money was deposited as 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 taken into account." The test would, therefore, be : whether, on the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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