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TMI Blog1992 (3) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... ued thereon on the cause of action set out in affidavit in support of judge's summons herein. Ceeta Polymers Ltd. has made Company Application No. 306 of 1991 for a similar direction to the respondents to refund a sum of Rs. 2,01,92,500 collected by respondent No. 1 as and by way of subscription money in respect of the public issue of shares from the members of the Indian public along with interest thereon at the rate of 15% per annum commencing from 12th July, 1991, and for other connected reliefs. Both these applications are heard together as the basic issues involved for consideration of the court for deciding the said applications are identical. Both the said applications involve consideration of the following questions: ( a )Whether the amounts in question in the custody of the first respondent-bank and/or its provisional liquidator, the second respondent, are impressed with trust for the benefit of the applicant-company to the extent of allotment money and for the benefit of the subscribers to the extent of the refundable amount or to the extent of the entire amount for the benefit of the company subject to the condition that the amount refundable must be refunded to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned with interest as discussed below. Section 69 of the Act prohibits allotment of shares unless the minimum subscription is received by the company as set out in the said section. Section 69(4) of the Act provides that all moneys received from applicants for shares shall be deposited and kept deposited in a scheduled bank until the specified contingencies occur. The latter part of section 69(4) of the Act prescribes penalty for contravention of the said provision. The said section contemplates refund of the entire subscription amounts to the subscribers in case the shares applied for are not allotted at all. Section 73 of the said Act deals with the subject of allotment of shares and debentures to be dealt with on the stock exchange. Section 73(3) of the Act is almost identical with section 51(3) of the English Companies Act, 1948. Section 73(3) of the Companies Act (1 of 1956) reads as under: "73. (3) All moneys received as aforesaid shall be kept in a separate bank account maintained with a scheduled bank until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission, until the disposal of the appeal, and the money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the bank receives the said amount is a fiduciary capacity and the arrangement made by the company and the subscribers is a special arrangement binding on the company as well as on the bank having regard to the scheme and object of the provisions contained in the Act and the content of the said provisions. The provisions of the Act impose a statutory prohibition on user of the application money for any purpose other than for the purposes specified in section 73(3A) of the Act. The said provisions are mandatory and incapable of being waived. If the bank uses the said amount for the purpose of its business, it follows that at the most the trustee is permitted to use the trust money temporarily without losing its character as a trust money subject to the statutory trust continuing to operate throughout. Sometimes, it happens that the trustees are authorised to use trust funds during the course of their business subject to special stipulation. In such cases, the trust fund does not cease to be trust fund merely because of permissive user of the trust fund, if any. In all such cases, the doctrine of tracing the trust fund would apply and the fiduciary obligation would attach to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drafts must be drawn in a manner so as to indicate that the amounts forwarded were towards the subscription on account of the issue and were meant to be credited in a separate account pertaining to the issue. Thus, the said prospectus provided for earmarking and segregation of subscription amounts towards allotment money as and when the allotment was made and for the specific purpose of refund of the entire amount in the event of non-allotment or of the excess amount in the event of part of the allotment to the subscribers coupled with an express or implied stipulation that the said amounts will not be treated as an asset of the company or of the bank at any point of time. ( c )By its letter dated 4th March, 1991, respondent No. 1 consented to act as bankers to the abovereferred issue. The applicant-company confirmed the appointment of respondent No. 1 in this behalf by its letters dated 9th and 29th of April, 1991. ( d )On 29th April, 1991, the abovereferred issue of convertible debentures for members of the public was opened. The said issue was closed on 3rd May, 1991. Between 29th April, 1991, and 10th May, 1991, issue IV NRI's was opened. Between 29th April, 1991, and 10th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instructed respondent No. 1 to transfer Rs. 7,52,500 in respect of the rights issue pertaining to the aforesaid issue of convertible debentures to the State Bank of India. The applicant has filed a table/statement of account pertaining to the amount collected by respondent No. 1 indicating the amounts to be appropriated towards allotment money and the amounts to be refunded to the subscribers. The said table is appended hereto and marked 'A' and shall form an integral part of this judgment. The applicant-company has represented to the court that the applicant-company is entitled to receive Rs. 1,26,21,000 as allotment money towards allotment of debentures to the various subscribers who had submitted their application to respondent No. 1 for allotment of debentures. The applicant-company has represented to the court through its learned counsel that in view of the penal provisions of the Act, the applicant-company has already allotted the debentures and already issued refund orders in a sum of Rs. 91,76,000 to the concerned subscribers and the applicant is entitled to seek reimbursement from the respondents in respect of the said amount on such terms and conditions, if any, as this H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest at the rate of 15% per annum on the excess application money will be made to the applicant-subscribers as per the guidelines issued by the Government of India, Ministry of Finance, vide their letter No. F8/6/SE/79, dated 21st July, 1963, as amended by letter No. F/14/2/SE/85, dated 27th September, 1985, addressed to the stock exchange. ( d )On 3rd April, 1991, the abovereferred public issue was opened. On 3rd May, 1991, the issue was closed. The said issue was oversubscribed. The first respondent-bank received 22,600 applications for allotment of 38,48,500 shares in its capacity as bankers to the issue for and on behalf of the applicant. The first respondent-bank collected a sum of Rs. 2,01,92,500 as subscription amount in a fiduciary capacity. The said amount was specifically earmarked as "subscribers' money" in terms of the mandatory provisions contained in the Companies Act, 1956. On 8th June, 1991, the first respondent-bank issued its final certificate confirming receipt of the said amount from members of the Indian public as subscription amount. ( e )On 29th June, 1991, the board of directors of the applicant allotted the shares to the various subscribers in a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation. Respondents Nos. 1 and 2 expressed their inability to refund the said amount. The applicant has, therefore, taken out this judge's summons for appropriate directions to both the respondents to refund the amounts with interest on such terms and conditions as this court deems fit to impose. One Mr. Nicolas Handley Jones, a constituted attorney of the joint provisional liquidator of respondent No. 1, appointed by the Grant Court in Cayman Islands, has filed an affidavit in reply. By the said affidavit, it is pointed out that respondent No. 2 has wrongly taken into custody, possession and control of all the assets, properties and affairs of the first respondent-bank at Bombay. There is no merit in this contention. I have already rejected a similar contention in my order dated 27th February, 1992 * , passed in Company Application No. 242 of 1991. This court has jurisdiction to wind up a company incorporated outside India as an unregistered company if such company has its assets in India and if such company has carried on business in India. On the merits of these applications, the deponent of the said affidavit has merely stated that the deponent does not admit that the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Act. The said trust continues throughout so long as the said moneys are kept deposited or retained to the issue in question. Relief to be granted to the company can be moulded by the court depending on the fact as to whether the refundable amounts are already refunded to subscribers by the company or not. Learned counsel for respondents Nos. 1 and 2 has controverted the said contentions. Learned counsel for respondent No. 2 submits that there is no privity of contract between the first respondent-bank and the subscribers. Learned counsel for respondent No. 2 submits that the relationship constituted by the said deposit between the bank and the company is an ordinary relationship of banker and customer, i.e. , debtor and creditor, and there is no special relationship in respect of the said amounts as contended on behalf of the applicants. Learned counsel submits that the amounts in question form part of the general assets of the first respondent-bank and must be available to the unsecured creditors of respondent No. 1 for pro rata distribution in case respondent No. 1 is directed to be wound up. Learned counsel submits that even when a charitable trust opens a bank ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular specific purpose' it is not a general deposit creating the relationship of debtor and creditor, but a 'specific deposit' creating the relationship of bailee and bailor or trustee and beneficiary. " (emphasis * supplied). The above statement of law was approved by the Supreme Court and lays down the relevant principles accurately. In Shanti Prasad Jain's case [1963] 33 Comp Cas 231 (SC), the account was opened with German bank with a stipulation that the said Mr. Jain was not to operate the said account except for the purposes specified and the bank was informed of the arrangement under which the deposit was made. It was held by Venkatarama Aiyar J. that, in the circumstances, the bank had only custody of the money as if it was a stakeholder with liability to hand it over to the person who would become entitled to it under the arrangement. It was held by the court that the moneys so held by the bank under a special arrangement could not constitute a relationship of debtor and creditor but constituted the bank as a trustee or a stakeholder. In New Bank of India Ltd. v. Pearey Lal, AIR 1962 SC 1003; [1962] 32 Comp Cas 91, the Supreme Court held that the amount was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relationship constituted was not that of debtor and creditor, in view of the special terms of the agreement. In other words, when amounts are deposited as a specific deposit for a specific purpose with specific restrictions and the same are earmarked or segregated for a specific purpose, the relationship between the bank and the depositor is that of trustee and beneficiary. In Nanwa Gold Mines Ltd., In re : Ballantyne v. Nanwa Gold Mines Ltd. [1955] 3 All ER 210; [1951] 25 Comp Cas 443, Harman J. of the Chancery Division held that the application moneys were impressed with a trust for the applicants-subscribers in view of the statutory provisions contained in section 51(3) of the English Companies Act, 1948, and also in view of the terms of a circular letter issued by the company promising to keep the said amount in a separate account. In this case, the question for consideration of the court was as to whether the amount collected from the intending subscribers to the issue in pursuance of the circular issued by the company and deposited in a separate account were impressed with trust for the benefit of subscribers or were assets belonging to the company so as to form part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n amount to the subscribers in terms of its statutory obligation or on the condition that the amount refundable was definitely to be refunded forthwith if the same has not yet been refunded. The court can mould the relief and adjust equities keeping in mind the mandate of the relevant provisions contained in the Act. It is obvious from this case that the creditors of the company or creditors of the bank can never have lien over the funds separately deposited and earmarked with the bank in a separate account concerning the public issue. If the contention urged on behalf of the respondents is accepted, it would lead to absurdity and it would mean that the provisions contained in sections 73(3) and 73(3A) of the Act and other connected provisions are totally meaningless and ineffective. Such a construction of the beneficial provisions of the Act is impossible. The capacity in which the bank holds this amount is clearly fiduciary and the relationship constituted by a transaction of such specific deposit for a specific purpose is not the ordinary relationship of creditor and debtor. It is not possible to decide this case with reference to the analogy of an illustration given by learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abovereferred primary purpose failed for some reason. The bank asserted that the bank was entitled to set-off these amounts against the liability of R. R. Ltd. in the overdraft account. The Court of Appeal as well as the House of Lords held that, as between the respondent and R. R. Ltd., the terms on which the loan was made were such as to impress the money with a trust in favour of the respondents in the event of the dividend's not being paid, because the money was never to become part of the assets of R. R. Ltd., but was entrusted for being used only for payment of dividend coupled with the condition that if for any reason the dividend was not paid, the money must be refunded and/or repaid to the respondent. The court held that law implied a primary trust for payment of dividends and a secondary trust for the benefit of the respondent if for some reason the primary trust failed. The court took note of the fact that the bank was fully aware of the terms on which the said amounts were entrusted by the respondents to R. R. Ltd. for the purpose of being deposited in a separate account with the bank. During the course of his judgment, Lord Wilberforce observed that arrangements of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authority of the company till the specified purposes are carried out. If the company or its directors have already refunded or undertake to refund the refundable portion of the amount to the subscribers, the court can compel the bank to refund the entire amount to the company with or without interest as the court deems fit. In Rai Bahadur Seth Jessaram Fatechand v. Om Narain Tankha [1967] 2 SCR 429; [1967] 37 Comp Cas 204 , the apex court held that the question as to whether the "security deposit" furnished in a particular case could be treated as an amount impressed with trust will have to be determined on the basis of the terms of the agreement and all the facts and circumstances of the case. It was held by the court that if a trust can be clearly spelled out from the terms of the agreement, there ends the matter. It was held by the court that the character of the amount in question as trust money is not destroyed merely because the amount is kept in a fixed deposit or the party with whom the amount is deposited agrees to make payment of interest to the depositor. At this stage, it is of some significance to recall the observations of the Supreme Court in Shanti Pras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the result, I pass the following order: Operative part of order on Company Application No. 271 of 1991 ( Ref. Varun Shipping Co. Ltd. ) . ( a )Respondent No. 1-company and respondent No. 2 as provisional liquidator of respondent No. 1 are directed to deposit in this court a sum of Rs. 2,17,97,000 (rupees two crores seventeen lakhs and ninety- seven thousand only) on or before April 16, 1992. The prothonotary and senior master shall allow the applicant to withdraw the said amount forthwith on such deposit being made soon after April 16, 1992, subject to the applicant complying with the following conditions: ( i )The applicant shall file an affidavit in this court stating therein that the applicant has already allotted and despatched the requisite debentures to the concerned subscribers and the applicant is entitled to appropriate a sum of Rs. 1,26.21,000 (rupees one crore twenty-six lakhs and twenty-one thousand only) as allotment money out of the abovereferred amount of Rs. 2,17,97,000. The applicant shall also state in the said affidavit in conformity with the statement of its learned counsel during the course of arguments that between July 10 and 12, 1991, the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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