1. In this summons the claimants dispute the order made by the liquidator refusing to admit the claim of the claimants as preferential creditors and the claim arises in the following manner. The firm of Velji Lakhamsey had prior to April, 1949, a current account with the bank in liquidation and on 29th April, 1949, there was a credit of Rs. 14,000 odd in that account. As Velji Lakhamsey wanted to pay a certain amount to Podar Trading Co. Ltd., they added a further amount of Rs. 7,000 odd making a total of Rs. 22,776-3-4. On 29th April, 1949, the claimants sent a cheque in the sum of Rs. 22,600 with a letter asking the bank to issue a draft payable to Podar Trading Company in the sum of Rs. 22,600. The bank in liquidation on 29th April, 1949, issued a pay slip in favour of Podar Trading Company or order. Podar Trading Company presented this through their bankers, the Chartered Bank of India, Australia and China for payment, but the bank in liquidation failed to pay this amount. In these circumstances the claimants argue that in fact they are now in the shoes of Podar Trading Company and that the bank held these moneys on behalf of Podar Trading Company as bailees or trustees, that this amount in the hands of the bank in liquidation was impressed with a trust in favour of Podar Trading Company and therefore Podar Trading Company are entitled through the claimants to follow these moneys as moneys had and received on their behalf by the Exchange Bank, the bank in liquidation. The facts of the case are not in dispute. The question is whether this was a normal purchase of a demand draft by the claimants through their bankers or whether the bank in liquidation received these moneys for a specific purpose and in the capacity of an agent for applying these moneys for a specific purpose.
2. Now, it must be stated that on the facts of this case, the claimants had a current account and it is not as if these moneys were expressly deposited by the claimants for the specific purpose of paying Podar Trading Company. In fact the current account showed a credit of Rs. 14,000 odd; they added Rs. 7,000 odd and purchased a demand draft or a pay-slip payable to Podar Trading Company or order. In these circumstances the question is whether this transaction was an ordinary transaction between the bank and its customer, namely, the purchase of a demand draft which is incidental to the normal business of the bank, or whether these moneys were received from the claimants for the specific purpose of being earmarked as payable to Podar Trading Company.
3. In support of his contention Mr. Khambatta has relied upon two decisions of the Madras High Court. The first is the case of Official Assignee of Madras v. Ramchandra Iyer I.L.R.  33 Mad. 134. In that case who owed certain money to M.C. sent a cheque to bank A for the amount asking A to place the amount to the credit of M.C. who at that time had no account with the bank A. The bank informed M.C. that the amount was placed to her credit M.C. on 5th October asked the bank to send her the amount and the bank sent her the amount and the bank sent her a form of receipt to be signed by her which was signed and returned. In the meanwhile the bank had suspended payment. The bank had applied to the court for relief of the insolvent debtors and the bank's estate was vested in the official Assignee. M.C. moved for the payment of the amount. It was held that the relationship of debtor and creditor did not exist between A and M.C. and that the former held the moneys as agent of the latter when payment was suspended. Mr. Justice Munro held that as the receipt and demand for payment reached the bank before payment was suspended, the result was the same as if M.C. attended in person and demanded payment, and on the bank's failure to remit the moneys which it was the bank's duty to do the bank held the moneys in a fiduciary capacity. Mr. Justice Abdur Rahim held that as the bank received the moneys for a particular purpose and as there was no account between the bank and M.C. the bank had no right to appropriate the moneys and did not purport to do so. Now in this case it is necessary to note that O who owed certain moneys to M.C. the claimant in that case, sent a certain cheque to the bank for being realised and placed at the disposal of M.C. These moneys were realised and the bank communicated with M.C. informing her that those moneys were lying at her disposal. Clearly in those circumstances the bank at that point of time held the moneys which were specifically deposited with the bank for the express purpose of paying M.C. for the benefit of M.C. and in those particular circumstances to my mind it is more than clear such moneys in the hands of the bank were impressed with a trust in favour of M.C. The next authority referred to is another decision of the Madras High Court in the case of official Assignee of Madras v. Rajan Ayyar I.L.R. (1913) 36 Mad. 499. In that case again the facts must be clearly born in mind and what happened was that A paid moneys into a bank with express instructions to pay over the same to B who had no account with the bank and the bank wrote to B stating that they had received the moneys and held the same in suspense account pending instructions from B. It was held on appeal that the bank held the amount as agents of A for remittance to B and not as bankers either of A or B. Mr. Justice Abdur Rahim in that case observed that the relationship between the bank and B was not that of debtor and creditor and that the bank held the moneys in a fiduciary capacity as bailee of agent and a banker holding moneys of a person 'in suspense' does not treat it like an ordinary customer's money. Looking at the facts and the observations in these two cases, it is clear that in such cases the bank was not dealing as debtor and creditor between two parties. There was a clear agency namely that the bank should receive certain amount as agents of A and pay over the specific amount to B. Now in this transaction the bank is not entitled to use these moneys for any purpose of the bank at all, but acts only as a transmitting agency to transmit the moneys received from A to B and in those circumstances the bank is a bailee on behalf of B when these moneys are either received or collected.
4. A further case referred to is the case of Suganchand and Co. v. Brahmayya and Co. : AIR1951Mad910a . In that case it was observed that a mere purchaser of a demand draft from a bank is only a creditor of the bank and in those circumstances there is no fiduciary relationship between the bank which issued the demand draft and the customer who took it. The ownership of the moneys paid for the purchase of the demand draft passes to the bank, as it is one of the usual and recognised banking transactions and the purchaser gets what he has bargained for, namely a draft of the bank the payment of which depends on the solvency of the head office at the time of the presentation of the draft. In other words when a party purchases a demand draft, he takes the risk of that demand draft not being met at the time of presentation. On this an exception is engrafted and that exception is as observed in that case namely where a bank issues a draft on its own branch and there is an express or implied agreement between the parties at the time of the issue of the draft by the bank on its own branch that the sole object of the issue of the draft is to transmit the moneys from one place to another for the express purpose of being paid to the persons applying for the draft or some nominee of his, a fiduciary relationship between the bank which issued the draft and the customer who took it exists, provided the bank has not actually parted with the moneys held by it as agent acting on the instructions of the principal, thus terminating the relationship of principal and agent, and it is observed that it is within those strict limits that this exception to the general rule has to be made.
5. In these circumstances the question here is whether there was any implied or express agreement between the bank and the claimants when this transaction took place. The essence of the transaction was in my opinion the normal transaction a bank puts through daily and hourly, namely they sold a demand draft in favour of a particular party, the firm of Velji Lakhamsey. Having sold the demand draft they transferred the amount to their suspense account. It is pointed out by Mr. Khambatta that this amount having been deposited to the account of Velji Lakhamsey was to be kept in the suspence account. In my opinion once the bank debits this account it is entirely for the bank how to utilise the sale proceeds of the demand draft, and if it is entirely for the bank to utilise the sale proceeds of the demand draft, having debited his account, there is no question of earmarking this specific amount for the specified repayment of this demand draft.
6. I have been referred to a judgment of the Court of Appeal in the case of The Jodhpur Commercial Bank Ltd. v. R. Mathalone  O.C.J. App 21 of 1950, decided on September 20, 1950 (unrep)). The learned Chief Justice pointed out that in that case the Jodhpur Bank constituted the A.B.C. bank its agents for a specific purpose and that specific purpose was to realise the cheques and the hundies and to remit the proceeds in the mode indicated by the Jodhpur Bank namely that on realisation the proceeds were to be remitted by a bank pay-slip. The directions by the Jodhpur Bank were not that the A.B.C. Bank was to keep the money or that the money or that the money was to be sent to the Jodhpur Bank, but the mode of payment was clearly and definitely indicated and that mode was that the amount was to be remitted by a pay-slip of the A.B.C. Bank itself. The learned Chief Justice observed that in his opinion a fiduciary relationship did arise as between the two banks when the A.B.C. Bank was asked to carry out the specific direction given by the Jodhpur Bank with regard to its property, and then proceeded to discuss as to whether that particular fiduciary relationship came to an end, and, if so, when it came to an end, and he observed that it would terminate when the business of the agency would come to an end, namely when those instructions were carried our and that was when the pay-slip was sent to the Jodhpur branch. He observed that he could well understand a case where a person may ask a bank to collect a specific amount on his behalf and to keep it earmarked and not to use it and to return it to him whenever called upon to do so. Such instructions would creat a trust and the obligation would attach to the money and the bank would have no right to use the money. On the other hand he observed that there may be another case where a customer may tell the bank to collect the money and then to pay that money on demand, permitting the bank to use that money, in which case after the money was realised the relationship between the person giving the instructions and the bank would not be that of a cestui que trust and a trustee but that of a debtor and creditor.
7. Therefore, to my mind looking at the facts and circumstances in the matter before me there is in my opinion no evidence whatever of any specific instructions being given by the claimants or any such instructions being implied from the nature of the transaction. This was purely as I have stated above a normal transaction between the bank and its customer who bought a demand draft against the moneys lying in his current account. When the demand draft was sold by the bank the bank was paid through that current account and those moneys were not earmarked in my opinion for any specific purpose. When the demand draft was presented and had the bank been in a solvent state, the demand draft would have been met from the moneys of the bank and not from a specific amount earmarked for the purpose. To my mind once the bank had sold the demand draft there was no question of there being any impediment in the way of bank utilising and using the money of that sale for any purpose that they may have selected according to the exigencies of the bank.
8. In the two cases referred to above namely Official Assignee of Madras v. Ramachandra Iyer I.L.R. (1910) 33 Mad. 134 and Official Assignee of Madras v. Rajan Ayyar I.L.R. (1913) 36 Mad. 499.; 6 I.C. 383 clearly the moneys were handed over to the bank as agents of the customer to be paid over at a particular place to a particular party. That was a contract of agency between the bank and its customer and what is more is that in each of those cases the bank intimated to the third party that it was holding the moneys on behalf of the third party who could collect them. In other words the bank expressly intimated to the third party that they were bailees in each of the cases on behalf of the third party. In those circumstances to my mind there was no doubt that the moneys cannot be utilised by the bank for any other purpose except to pay over the moneys to the third party, and in that event the inference must necessarily follow that the bank was bound to pay over a specific amount to the third party and therefore the moneys would be impressed with a trust and therefore the claimants in that instance would be entitled to follow the moneys in the hands of the bank.
9. For reasons stated above I am unable to entertain this summons and to hold that the petitioners are entitled to rank as preferential creditors of the bank. The summons will therefore stand dismissed with costs. Counsel certified.
10. The claimants appealed.
11. By this appeal the appellants question the correctness of the decision of Mr. Justice Coyajee who held that they were not preferential creditors for the winding up of the Exchange Bank of India & Africa Limited. It appears that on April 29, 1949, the appellants had to their credit in the current account of the bank a sum of Rs. 14,000 odd. On that day the appellants added a further sum of Rs. 7,000 odd, and they wrote a letter to the bank asking them to deliver to them a draft of Rs. 22,600 in the name of Podar Trading Company. These instructions of the appellants were carried out by the bank and the bank sent to the appellants a pay order in favour of the Podar Trading Company. The Podar Trading Company presented this pay order through their bank, the Chartered Bank, on April 30, 1949. The pay order was not honoured and it was returned to the Chartered Bank with the endorsement : 'No advice, present again.' It was again presented on May 2, 1949, and it was dishonoured. On that very day the bank suspended payment. On June 14, 1949, the bank as wound up by an order of the court and the appellants made a claim that they were preferential creditors on two grounds : (1) as the customer of the bank, and (2) as the endorsee of the pay order which had been issued to Podar Trading Company.
12. Now, Mr. Jethmalani has cited before us several decisions. In our opinion, it is unnecessary to consider them because the principle that emerges from these directions is clear and well established, and the question in this appeal is not so much to discover what is the true principle of law which should be applied, but how to apply a well settled principle to the facts of this case.
13. Now, the principle of law, briefly stated, is this. The relationship between a banker and its customer is that of a debtor and creditor and any amount due by the banker to the customer in that relationship cannot be claimed by the customer from the bank as a preferential creditor if the bank is wound up. But a customer may give certain specific directions to the bank and constitute the bank its agent. If the bank acts as an agent and not as a debtor, then the agency brings about a fiduciary relationship between the customer and the bank and that fiduciary relationship lasts until the agency is determinated. Therefore, if the customer were to give directions to the bank that a certain amount must be paid to a certain person, then till that amount is paid pursuant to directions of the customer, the agency would continue and the bank would hold the amount not as a debtor of the customer but in the capacity of a trustee and the amount would be impressed with a trust. The matter may be looked at from a different point of view. If a certain amount of a customer is lying with the bank, the safe test which may be applied in order to determine whether that amount is impressed with any trust is to find out whether the bank is entitled to use that amount in the ordinary course of its business, whether it belongs to its general funds, or whether it is specially appropriated for a particular purpose and cannot be utilised by the bank for its normal ordinary business.
14. If these principles are clearly borne in mind then there is no difficulty in deciding this case. When we turn to the direction given by the customer on April 29, 1949, the instructions are clear and specific and the instructions are that the bank should deliver to them a cheque, as the customer calls it, or a pay order, as in fact it was in the name of Podar Trading Company. The bank carried out that instruction and sent the cheque or the pay order to its customer. As soon as this instruction was carried out, the agency terminated and whatever fiduciary relation there was came to an end. After the pay order had been delivered to the customer, it is impossible to contend that there was any obligation upon the bank to earmark this amount of Rs. 22,600 and that it had no right to utilise that amount for its ordinary normal business. The sum of Rs. 22,600 continued to remain part of the general funds of the bank and the only obligation upon the bank was to meet the cheque or the pay order when it was presented by Podar Trading Company. Therefore there was neither a trust as for as the customer was concerned because the customer's direction had been carried out and the agency had come to an end, nor was there any trust quae Podar Trading Company because the bank never intimated to Podar Trading Company that it was holding the sum of Rs. 22,600 for Podar Trading Company pending the presentation of the pay order.
15. Mr. Jethmalani has relied on the accounts maintained by the bank and he had emphasised the fact that when the pay order was issued by the bank to the appellants the bank debited the account of the appellants with the sum of Rs. 22,600 and credited an account which is described as the C.D. Miscellaneous Pay-Slip Issue Account. Mr. Jethmalani says that that is clear conduct on the part of the bank which shows that it removed this amount from the general fund and appropriated it to a specific purpose. In our opinion, far from this method of book-keeping supporting the contention of the appellants, it negatives the contention put forward by them. The matter would have been different if a specific account with regard to this pay order had been opened. The account in which this amount is credited is a general account in which all entries are made with regard to all pay orders issued by the bank. The account is maintained for the convenience of the bank and the account shows to the bank what pay orders they have to meet and when and for what amount. The account does not indicate that there is any special appropriation of this amount for any specific purpose. On the contrary, the account shows that the amount in question continued to remain part of the general funds of the bank and the bank merely for its own information and convenience made certain entries in certain accounts which did not in any way change the nature of the amount or impress it with any trust. There are cases undoubtedly where even the sending of a pay order by the bank may be held to constitute a trust with regard to the amount covered by the pay order, but in all these cases it will be found that apart from the sending of the pay order there were circumstances which led the court to the irresistible conclusion that the direction given by the customer was not merely to send a pay order but to transmit the amount over to a particular place or to a particular person. Now, if we could read this direction given by the customer on April 29, 1949, as a direction to the bank that they should pay this amount of Rs. 22,600 to Podar Trading Company, we would certainly have upheld the contention of the appellants. But in our opinion there is no circumstance in this case which goes to suggest that the customer wanted the bank not merely to issue a pay order in the ordinary course but to hold this amount for the purpose of paying it to Podar Trading Company. Therefore that contention of the appellants must fail.
16. The second contention urged by Mr. Jethmalani is a rather startling one, that if a draft is presented to the bank before it suspends payment, and the bank wrongfully refuses to honour the draft, then the person entitled to the draft becomes a preferential creditor, and the effect of this contention is that if a debtor dishonestly refuses to pay a creditor the amount due to him on the due date, on the insolvency of the debtor the creditor becomes his preferential creditor. One has only to state the proposition to realise how untenable it is. Mr. Jethmalani in despair had to find some authority for this proposition and the only authority he could find, with respect, is a statement made by Mr. Justice MUNRO in Official Assignee of Madras v. Ramachandra Iyer I.L.R.  33 Mad : 134 where his colleague Mr. Justice ABDUR RAHIM expressly dissented from that view as to the statement of the law. The main point which arose in that case was entirely different and that point came up for final consideration before a full bench of the Madras High Court in Official Assignee of Madras v. Rajam Ayyar I.L.R.  36 Mad. 499 and the full bench did not express any opinion as to the correctness of the view taken by Mr. Justice MUNRO. With respect to the learned judge, we find it unable to accept the view formed by him and given expression to in that decision.
17. The third contention urged by Mr. Jethmalani is that we must give effect to the well known principle of equity that equity regards that as done which ought to have been done, and the argument is put this way. Mr. Jethmalani says that there was no reason whatever why the bank refused to honour the pay order on April 30, 1949. He suggests that this was due because the bank or its officers knew that very soon the bank was going to suspend payment. Therefore according to Mr. Jethmalani, we must with the assistance of this principle of equity hold that on April 30, 1949, the pay order was honoured and the creditor was paid. Mr. Jethmalani says that if the creditor had been paid he would have received his debt in full and therefore we must give him a preferential status in the liquidation and allow him to be paid in preference to the general body of creditors. In our opinion, the principle of equity, which is undeniably sound, has no application to the facts of this case. Equity would not permit the bank to deny the debt, nor would it permit the court when it is winding up the bank to deny to the creditor his claim against the bank. But nobody is denying the appellants the claim to this amount, nor is anybody suggesting that he is not a creditor. But what the appellants are claiming is not that they are creditors, but that they are preferential creditors, and in deciding whether the appellants should be paid in preference to other creditors the principles that have got to be applied are not the principles of equity but legal principles. Equity is not concerned with whether a creditor should be paid in preference to another creditor. These questions are governed by technical legal principles which have been well settled. Again, in order that we should hold that the appellants are entitled to be paid in preference to others, we must come to the conclusion that the sum of Rs. 22,600 was held by the bank in trust. Unless the amount was held in trust, there is no principle on which the claim of the appellants can be justified for being treated as preferential creditors. Trust is as much a principle of equity as the principle on which Mr. Jethmalani is relying, and it is precisely because it is a principle of equity that the courts have laid down that the right to be treated as preferential creditor only arises when the moneys with the bank are not held merely as a debtor but held as a trustee. If the bank is to a trustee, as we have held it is not, in respect of this amount, then the appellants cannot justify their claim as preferential creditors on any other principle of equity which has no application whatsoever.
18. In support of this principle reliance was placed on certain observations of Chief Justice RAJAMANNAR in Suganchand & Co. v. Brahmayya and Co. : AIR1951Mad910a But it may be pointed out that in that case the observations were made in a case where the Madras High Court came to the conclusion that the instructions given by the customer were not merely that a draft should be sent to him, but that the moneys should be transmitted, and therefore the Madras High Court held that those moneys were held in trust. Reliance was also placed on a judgment of Mr. Justice ACHHRU RAM in In the matter of the New Bank of India ( 19 Comp. Cas. A.I.R. 1949 E.P. 373. It is true that Mr. Justice ACHHRU RAM does enunciate the equitable principle on which Mr. Jethmalani is relying, but with respect the learned Judge clearly realises the difficulty of applying such a principle to a case where a company or a bank is being compulsorily wound up and where the claims and the interest of the ordinary creditors have to be considered as much as of those who claim a preferential treatment, and Mr. Justice ACHHRU RAM is at pains to point out that he was dealing with a case where a bank was not being wound up but was working under a scheme of management sanctioned by the court and he also says that this principle which he has enunciated would not apply where there was a compulsory winding up by the court. We are not dealing here with a case of a scheme where the court may agree to certain creditors being paid in a certain manner. We are here dealing with an order of winding up made by the court and payment of creditors according to law, and in law in our opinion the claim of the appellants to be treated as preferential creditors is not justified.
19. The result is that the appeal must fail and is dismissed with costs.
20. Liberty to the respondent's attorneys to withdraw the sum of Rs. 500 deposited in court and appropriate it towards satisfaction of the order for costs.
21. Appeal dismissed.