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PETITIONER: R. B. SETH JESSARAM FATEHCHAND

       Vs.

RESPONDENT: OM NARAIN TANKHA & ANR.

DATE OF JUDGMENT: 19/01/1967

BENCH: WANCHOO, K.N. BENCH: WANCHOO, K.N. BACHAWAT, R.S. SHELAT, J.M.

CITATION:  1967 AIR 1162            1967 SCR  (2) 429

ACT: Trust-Security deposited with company by sole selling agent- Interest payable by company-Deposit allowed to be mixed with other  funds--Deposit  whether held by company  as  trustee- Matters to be taken into consideration.

HEADNOTE: The  appellant  firm was appointed sole selling agent  of  a sugar  manufacturing  company and deposited  Rs.  50,000  as security  for due performance of the contract;  this  amount was to carry interest at 6 per cent per annum.  There was no restriction on the use of the said deposit by the,  company. According  to  cl.  (9) of the agreement  the  security  and interest  were  to  be refunded at the  termination  of  the agency;  in default of such payment the appellant  firm  was entitled  to a commission as if agency had  not  terminated. The  clause  further  said that "as long  as  security  with interest is not refunded and commission due is not paid this agreement  will not be terminated." The company was  ordered to -be wound up before the period of agency came to an  end. Consequent   on  the  winding  up  the  appellant  made   an application praying for refund of its security deposit along with  interest.  It was contended that as the  company  held the  amount  of  deposit  as a  trustee  the  appellant  was entitled to priority among the creditors.  On behalf of  the liquidators  it was denied that the amount deposited was  in the  nature  of a trust entitled to  preference  over  other debts.   The  company  judge  held that  he  amount  was  an ordinary  debt.  The Division Bench of the High  Court  also decided  against the appellant.  In appeal by special  leave to this’ Court. HELD:The deposit did not amount to a trust. 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. [434 C] 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

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provided for, and the fact that interest was paid, would  go a long way to show that the deposit was not impressed’  with the  character of a trust particularly when 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  ’ f relationship rather than the other  that  will also have to be taken into account. [436 B-C] In  the present case the company was free to use  the  money for its own purpose and had to pay interest on it.  Further, in  cl. (9) of the agreement the security was put on  a  par with  the  commission  which was nothing but  a  debt.   The courts  below  had therefore rightly  treated  the  security deposit as an ordinary debt. [436 F] Peter Donald Macpherson v. Dugald Mckechine and Ors.  XXVIII (1923-24)  Cal.   W.N.  721.  In the  matter  of  Travancore National and 430 Quilon  Bank  Limited,  Official  Liquidators  and   Another Applicants,  A.I.R.  1939  Mad. 337,  In  re  Manekji  Petit Manufacturing   Company  Ltd.   A.I.R.  1932  Bom.   31   1, Maheshwari  Brothers v. Official Liquidators, I.L.R.  [1942] All. 242, Keshetra Mohan Das v. D. C. Basu, I.L.R. [1943]  1 Cal. 313. Gee v. Liddell, (1866) 55 E.R. 1038, Knatchbull v. Hallett,  (1879-80) XIII Ch.  D. 696.  In re Hallett &  Co., [1894]  2 Q.B.D. 237 and Frank M.Mckey v. Maurcie  Paradise, 81 L. Ed. 75, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 891 of 1964 Appeal by special leave from the judgment and decree dated October  30,  1961 of the Allahabad High  Court  in  Letters Patent Appeal No. 83 of 1951. N.   C. Chatterjee, B. C. Mishra, B. R. G. K. Achar and M. V Goswami, for the appellant. Chaman Lal Pandhi and S. L. Pandhi, for the respondents. The Judgment of the Court was delivered by Wanchoo,  J. This is an appeal by special leave against  the judgment  and  decree  of tie  Allahabad  High  Court.   The appellant  is a registered partnership carrying on  business at  Kanpur. -It entered into an agreement in  December  1948 with the VijiaLakshmi Sugar Mills Limited, Doiwala, District Dehra  Dun  (hereinafter referred to as the Mills)  and  was appointed sole selling agent of the Mills.  According to the terms  of the agreement, the appellant ,deposited a  sum  of Rs.  50,000/-  as  security  for  due  performance  of   the contract, and this amount was to carry interest at the  rate of  Rs. 6/- per cent per annum to be paid by the Mills.   In November 1949 an order was passed. winding-up the Mills  and this  happened before the period of agency can* 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  security deposit -along with interest.   It  was also  prayed that the Mills held the -amount of  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.   That  claim was given up and we  are  now  not concerned with it. The liquidators admitted that there had been an agreement as alleged by the appellant and that a sum of Rs. 50,000/-  had

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been deposited with the Mills.  But their case was that this amount  -was  an ’Ordinary debt with respect  to  which  the appellant  could  not  claim any preference  and  thatt  the appellant’s contention that -the amount deposited was a  kin 1  of  trust  with the Mills was  not  -correct.   The  only question  that had to be decided therefore was  whether  the amount  of  Rs.  50,000/-  deposited  as  security  for  due performance  of the contract of sole selling agency  was  in the  nature of a trust which was entitled to preference.  or was an ordinary, ,debt.                             431 The  learned  Company Judge held on a  construction  of  the agreement that the amount was an ordinary debt.  He referred in  this  connection to the apparent  conflict  between  the decisions of the Calcutta and Madras High Courts on one side and  the Allahabad and Bombay High Courts on the  other  but was  of opinion that this conflict was largely  illusory  as the question whether the deposit in a particular case was in the  nature of a trust or was an ordinary debt  depended  on the  facts and circumstances of each case.  He finally  held that  the  deposit in question was not In the  nature  of  a trust  and,  was  not entitled to  any  preference  on  that ground. The appellant then went in appeal to, a Division Bench.. The Division Bench upheld the view taken by the learned  Company Judge  and  dismissed  the appeal.  The  High  Court  having refused to grant a certificate, the appellant applied for an obtained special leave from this Court, and that is how  the matter has come before US. The two main terms of the agreement, viz.  Nos. 8 and 9 bet- ween   the   appellant  and  the  Mills   which   call   for consideration in the present case are these:-               "(8)  That the firm has deposited 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  the rate on  termination  of  the               agency.   In  case  he  said  amount  is   not               refunded with interest thereon the firm  shall               be   entitled  to  commission  at  the   rates               mentioned   above   as  if  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." It  may be mentioned that the agreement was for a period  of one year which, as already indicated, had not expired before the winding up order was passed on November 8, 1949. 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  Miffs 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  re- funded along with interest on the,termination of the agency, but cl. (9) further provided that in case the money was, not refunded after one year, the appellant would be entitled  to commission as if 432

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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 words of  cl. (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. We  may  now  refer to the  apparent  conflict  between  the Calcutta  and  Madras  High  Courts  on  one  side  and  the Allahabad  and  Bombay  High Courts on the  other,  on  this question.  The representative cases on one side are: (i) Re: Alliance  Bank. of Simla: Peter Donald Macpherson v.  Dugald Mckechnie   and  others,(1)  and  (ii)  In  the  matter   of Travancore  National  and  Quilon  Bank  Limited,   Official Liquidators and other applicants (2).  On the other side the cases are (i)  In  re: Manekji Petit Manufacturing  Company, Limited(3) and (ii) Maheshwari    Brothers    v.    Official Liquidators(4).   The two Calcutta and Madras cases seem  to take  the  view  that  where there is  a  deposit  there  is creation  of some kind of trust even though the deposit  may carry interest and the person with whom the deposit is  made is entitled to use the money as his own.  It may however  be mentioned  that  the  Calcutta  case  was  with  respect  to provident  fund of the employees of a bank which  went  into liquidation  while  the  Madras case  was  with  respect  to security   deposit  by  an  employee  of  a  bank  for   due performance of his duties.  It may be added that such  cases were later provided for specifically by the amendment of the Indian  Companies Act (No.  VII of 1913) which was  made  in 1936  and by which s. 282-B was added to the  Companies  Act along  with cl. (e) in S. 230(1) of the same Act.  Even  so, these  two cases make it clear that the proper  approach  to the question is to ask whether on the interpretation of  the document, if there is one, or from proved or admitted  facts and circumstances a trust is established or not. if a  trust is  established, a provision for payment of interest by  the trustee does not destroy the character of the trust nor does the fact that the money is not segregated. The  matter was again considered by the Calcutta High  Court in  Kshetra Mohan Das v. D. C. Basu(5) in connection with  a deposit made by a sole, selling agent and the principle  for deciding whether the deposit was in the nature of a trust or a loan was  put thus:. (1)  XXVIII (1923-24) Cal.  W.N. 721. (3)  A.I.R. 1932 Bom. 311. (2)  A.I.R. 1939 Mad. 337. (4)  I.L.R. [1942] All.24. (5) I.L.R. [1943] 1 Cal. 313. 433                "If the security deposit of an employee or an               agent  of  a  company in  the  hands  of  such               company  can  be regarded  as  impressed  with               trust or held in a fiduciary capacity  company               then  such employee or agent is  entitled  the               whole of the security deposit even after  such               goes to liquidation........ In the absence  of               or  fiduciary  relation the  employee  or  the               agent  company  in  liquidation  is  merely  a

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             creditor of the and must share the assets  pro               rata with other There can in our opinion be no               disagreement by such to get back company  such               trust of the company creditors. There  can  in  our  opinion be  no  disagreement  with  the principle  so  enunciated, and the  conclusion  whether  the deposit  is in the nature of a trust or a loan  will  depend upon the facts,and circumstances of each case,  particularly on  the terms of the agreement if there is one  in  writing. The  difficulty  however arises in the application  of  -the principle to particular cases.  But the Calcutta and  Madras High  courts seem to lean to the view that where there is  a security  deposit  it will generally be in the nature  of  a trust. This  brings us to the cases on the other side.  The  Bombay High Court in Manekji Petit’s case(1) was ’also  considering the case of a deposit by an agent.  It considered the  terms of  the  agreement  which  provided for  Rs.  6/-  per  cent interest.   Ordinarily the company was entitled to  use  the deposit as it thought fit, but there was a provision in  the agreement  that in the event of the company raising  a  loan secured  by  debentures  of the  company  or  by  mortgaging company’s  property, the moneys deposited by the agent  were to be forthwith invested in Government securities and to  be earmarked in some manner satisfactory to the agent.  It  was held on the basis of this last clause in the agreement  that there  could  be  no trust  till  the  contingency  provided therein came to pass.  In that case that contingency had not come  to pass and the moneys were mixed with the  moneys  of the company and used by it.  The Bombay High Court held that upto that stage there was no trust created. In  Maheshwarl Brothers(2), the question arose  whether  the security  deposited  by the agents for  the  fulfillment  of their  obligation  under the agreement  was  impressed  with trust.   The Allahabad High Court considered  the  agreement and came to the conclusion that as interest was provided and further  as the company was entitled to use the  deposit  as its own and lastly because a floating charge was intended to be  created  on the assets of the company which  failed  for want of registration, the deposit was not in, the nature  of a  trust.   Thus  absence of segregation  and  presence  -of interest   coupled  particularly  with  a,provision  for   a floating  charge which had failed for want  of  registration inclined  the court to hold that the deposit was not in  the nature Of a trust. (1) A.I.R. 1932 Bom. 311. Sup. Court./67-14 (2)  I.L.R. [1942] All. 242. 434 It  will thus be seen that the view of the  learned  Company Judge that the conflict between the Calcutta and Madras High Courts on one side and the Allahabad and Bombay High  Courts on the other is more apparent than real is borne out by  the fact that in each case the court considered the agreement to decide   whether  on  the  terms  thereof  and   facts   and circumstances  of the case the deposit was impressed with  a trust,  though  it  must be  admitted  that  the  conclusion reached was not the same. We  are  of opinion that 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  he 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

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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 s. 51 of the Indian Trust Act, (No. 2 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.  It is true that where there  is a  clear trust and the trust deed if any provides  that  the trustee  may  use the trust property as he likes,  the  fact that the trustee can mix the trust property with his own may not  make  any  difference.  But where  there  is  no  clear indication  that  a security deposit was  impressed  with  a 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.  But where the  person with  whom the deposit is made is to pay interest it may  be possible  to  infer that payment of interest  is  a  pointer towards  there being no trust.  Further any other  provision in the agreement and any other circumstance as to the manner in                             435 which  the deposit was dealt with may also have to be  taken into  account  in  coming  to  the  conclusion  whether  the security  deposit in a particular case was impressed with  a trust or not. We  may  now refer to some English and.  American  cases  in this  connection.   In  Gee  v.  Liddell(1)  the  facts  and circumstances of the case were considered and it was held on those  facts and circumstances that there was a  trust.   In that cast pound 2,000 had been left as trust by a  will,-but the executor who was’, the son of the testator said that his father had intended to bequeath pound 3,000 and the question was  whether the further pound. 1,000 was also a trust.   On the facts and circumstances of that case it was held that as the amount bequeathed (namely, pound 2,000) was certainly  a trust,  -the addition of pound 1,000 to it by  the  executor would  be  of the same kind and would be  equally  impressed with trust.  That case also shows that where a trust can  be inferred  clearly a provision for payment of interest  would be immaterial. In  re:  Hallett’s Estate, Knatchbull v. Hallett(2)  it  was held  that if a person held money in a  fiduciary  character but  mixed it up with his own account, the person  for  whom the  money was held could follow it and had a charge on  the balance  in the bankers’ hands.  This case again shows  that the  main question that courts have to decide in such  cases is  whether  on  the facts  and  circumstances  a  fiduciary

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relationship is established.  If it is established, then the fact  that the money was mixed with the trustee’s money  may not make any difference. In  re: Hallett & Co.,(3) segregation was the test used  for the purpose of deciding whether there was trust or not. In  Frank  M. McKey v. Maurcie  Paradise,(4)   the  question arose  with  reference  to a claim of  an  employee  welfare association  against  the  employer and  it  was  held  that without  segregating  any money as due  to  the  association there  could be no trust.  This case shows the  significance of  segregation in arriving at the inference  whether  there was a trust. A consideration of these English and American cases also  in our opinion shows that the first question in each case where the  court  is  dealing with a security deposit  is  to  ask whether  on  the agreement in writing, if any,  and  on  the facts  and  circumstances of the case and.  conduct  of  the parties  it  can  be  said that  the  security  deposit  was unpressed  with some kind of a trust.  If that can  be  said then  the  question whether interest was  provided  for  and whether the trustee could mix the deposit money with his own money would not be of importance and would not take away the character of the deposit being impressed with a trust.   The mere  fact  that money was deposited as a  security  is  not sufficient to come to the conclusion (1)  (1866) 55 E.R. 1038. (3)  [1894] 2 Q.B.D. 237. (2)  (1879-80) XIII Ch.  D. 696. (4)  81 L. Ed. 75. 436 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 with a trust.  If a trust can clearly be spelled out from   the  agreement  that ends  the  matter.  spelled  out clearly  the fact there was for and the fact  that  interest was  to be to show that the deposit was not impressed  trust particularly  where the person with whom the made could  mix it  with his own money and could use it In such a  case  the inference  would  be that the relationship the  parties  was that of a debtor and creditor.  Further these  circumstances if  there  is any other term which  a security  deposit  was impressed   the  terms  of But if the  trust  cannot  be  no segregation  provided  paid would go a long  way   with  the character  of  a deposit was for  himself.  between  besides suggests one kind of relationship rather than the other that will  also have to be taken into account.  Illustrations  of this  will  be  -found  both in the  Bombay  case  (i.e.  in Manekji’s   case(1)  and  in  the  Allahabad   case   (i.e., Maheshwari  Brothers’ case(1).  In the Bombay  case  besides absence of segregation and presence of interest there was  a further  fact that in certain circumstances segregation  had been provided for.  The court was entitled to take that fact into  consideration  and  hold  that  the  deposit  was  not impressed  with trust till segregation took place.   In  the Allahabad  case a floating charge was created  which  failed for  want  of registration, and that circumstance  was  also used  to show that the relationship between the parties  was that of a debtor and creditor and not that of a trustee  and beneficiary. Let  us  now  apply these principles to  the  facts  of  the present case.  The facts show that there was no  segregation in  this case and the Mills could mix the  security  deposit with its own money and use it for its own purpose.   Further

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because  the Mills could use the money for its own  purpose, it   had  to  pay  interest.   In  addition  to  these   two circumstances  which would incline one to the view that  the relationship was that of a debtor and creditor, there is the further  fact  that cl. (9) of the agreement  provides  that even though the period fixed in the agreement would continue if  the  security deposit mission due is not  paid.We  agree Judge that the last words in cl.(9) commission due on a par. The commission other than a debt; the security deposit  That is  a further indication that the case was that of a  debtor and  creditor   are  of  opinion that  the  High  Court  was commission  due is not paid. The agreement is  not  refunded and  the  commission  with  the  learned  Company  make  the security  deposit  and  due can be nothing is put on  a  par with that relationship in the resent In the circumstances we right  in its view as to the nature of the security  deposit in the present case. The  appeal  therefore fails and is  hereby  dismissed  with costs. G.C.                          Appeal dismissed. (1) A.LR. 1932 Bom. 311.       (2) LL.R. [1942] All. 242. 437